Dynamic Path of a Housing Market Returning to Normal

Housing market conditions are beginning to look more normal across the country as price corrections in the formerly hyper-hot markets of the West Coast spread to high profile markets such as Phoenix and Austin; but price growth continues due to inventory constraints, albeit at a slower rate, in CBSAs where prices have remained more affordable.

Last year, at this time, the real estate market was on fire. Market conditions in more than half of U.S. zip codes ranked “hot,” according to a proprietary ranking by Collateral Analytics, a division of Black Knight, that evaluates housing markets using nine quantitative factors, including:

  • Number of Sales
  • Number of Active Listings
  • Months of Remaining Inventory (MRI)
  • Median Sold Price
  • Median Sold Market Time
  • Median Active Listing Price
  • Median Listing Active Market Time
  • Median Sold-To-List Price Ratio
  • Number of Foreclosure Sales as a Percentage of Regular and REO Sales

Based on their aggregate, weighted performance, markets are rated from “distressed” to “hot,” with ratings presented graphically on a thermometer.

Historically, about two-thirds to four-fifths of all markets tend to fall into one of the middle three categories: “good,” “normal,” or “soft.” Only a modest number, typically less than 10%, show up as “hot” or “distressed,” even at the top or bottom of normal cycles.

That all changed during the COVID-19 pandemic, when the housing market, just beginning to rebuild inventory after the Global Financial Crisis, soared into the stratosphere, fueled by extraordinarily low interest rates and a global shift to remote work.

Between August and November of 2020, the number of zip codes ranked as “hot” more than tripled, and demand only increased from there – which is how we found ourselves, in November 2021, (Exhibit 1) in unprecedented territory, with “hot” being the new “normal.”

Exhibit 1

Flash forward to today, and we see market conditions returning to a more normal distribution – that is to say, a partial bell curve centered on “normal”. A snapshot of market conditions as of November 2022, (Exhibit 2), still shows the residual effects of the recent housing boom, but the overall trend is clearly back toward the center.

Exhibit 2

Looking Deeper Into Market Dynamics

Exhibit 3 shows U.S. zip codes by the category of market condition into which they fall over time from early 2005 until November of 2022 on a monthly basis. Note the large proportion of normal and good markets until just a few years ago, when almost no markets were normal and most were strong or good. Recall that “strong” and “hot” typically represent just a small fraction of the market, but during this period of near-zero real mortgage rates, most of the US residential markets were strong or hot and inventory flew off shelves. Now, almost as quickly, the pattern has reversed and while inventories remain low, we are slowly approaching a more normal distribution of market conditions.

Exhibit 3

The proportion of zip codes with normal market conditions is a key indicator of this return to normal. While we are not yet at the typical 40% to 70% normal range, we are getting close (Exhibit 4).

Exhibit 4

Markets are finally returning to more normal levels of inventory and slower time on the market. But why? The biggest difference year over year, is that the Fed is no longer stimulating asset prices by holding interest rates artificially low. The 30-year fixed-rate mortgage, has more than doubled, from ~3% in November 2021 to approximately 6.5% today.

That has had a dramatic effect on the mortgage origination pipeline. As reported in our most recent Originations Market Monitor, total rate locks were down 61% year over year at the end of October. Purchase locks, specifically, were down ~40%.

Exhibit 5 shows zip code level market conditions in November 2021. Note the preponderance of green, the color assigned, in various shades, to hot and strong markets.

Exhibit 5

Exhibit 6 shows market conditions for the same zip codes in November 2022. Even at a glance, it is apparent that many markets have returned to normal conditions.

Exhibit 6

Looking at the underlying data, we see one of the biggest factors driving the change in conditions is Months of Remaining Inventory (MRI). Home inventories have increased across the country. This is mostly a result of the impact of higher mortgage rates on the demand side.
Not all markets have been affected equally. Our new “normal” seems to include a bifurcation based on affordability. Essentially, markets that experienced a huge run-up in home values are now seeing prices pulling back. In some markets, such as Los Angeles, where it still takes >73% of the median household income to make monthly principal and interest payments on a median-priced home, prices have pulled back from their peaks. Home prices in San Francisco and San Jose are now lower than they were a year ago.

Let’s examine this phenomenon more closely by looking at market conditions in two representative markets representing each side of the divide.

In Exhibit 7, we see the Austin, Texas CBSA where MRI) shot upward this past summer and sold prices fell.

Exhibit 7

In contrast, Exhibit 8 shows the Columbus, OH CBSA where MRI has remained very low and prices have held up well.

Exhibit 8


What may feel like a housing crash to anyone who entered the market at or near its peak in the past year is simply a correction. It is no longer a seller’s market. It is no longer a market where sellers can expect auction-like bidding to push offers above list prices. Homes listed for sale will now require more time on the market. The pool of buyers has been dramatically reduced by mortgage rate increases. This slower market is not atypical, but rather a return to the norm.

Analysts often talk about the national “median” as a benchmark for home price trends, few people are actually “median buyers” of “median homes.” Not all neighborhoods respond equally to mortgage rate increases. Home prices in some markets rose way more than in others and are now falling faster. Buying in some pandemic boomtowns has cooled as workers return to the office. Bottom line: home prices are local. We will continue to follow home price trends at the local level and follow up with our findings as new trends emerge.


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