Things have been good, maybe too good, for quite some time. Is a recession coming? Will Northwest Arkansas be immune?
Two national indexes measuring changes in the value of residential real estate, the Case-Shiller Price Index, and the FHFA Price Index, rose more than 40% from May 2020 until June 2022, but that record climb is over. Since that time, the Case-Shiller index is down 2.4% and the FHFA is down 1.1%, with the biggest declines so far in the western region of the U.S. (San Francisco, Seattle, Phoenix, San Diego, and Las Vegas). According to First Trust, Housing Outlook for 2023, “[Nationally] the drop in home prices should continue. Prices got too high relative to rents and need to fall more to better reflect rental values. We expect a total decline, peak-to-bottom in the 5-10% range, nothing like the 25% drop in 2006-11.”
The bright spots? First Trust asserts, “Compared to the average of the past forty years, home prices are already close to fair value when measured against construction costs. Second, there is no massive excess inventory of homes, unlike during the prior housing bust. And, unlike during the subprime-era, the vast majority of homeowners with mortgages are locked-in at extremely low fixed rates, which means they will be very reluctant to sell.”
At the end of 2022, the average mortgage rate for a 30-year fixed loan was 6.67%, more than double what they were at the start of 2022. The impact of this is evident in the existing home market. While home sales hit the fastest pace since 2006 in January 2021 - 6.65 million, this has now dropped 38.5%. The effect of the change in interest rates is twofold: There’s a reluctance or inability of new buyers to purchase, and existing homeowners are going to be less likely to sell if it means they would be required to purchase a new home at substantially higher interest rates. New construction and homes not owned by owner-occupied individuals, will be completely immune to this second factor. Even with falling prices, demand is still high (especially in NWA). Historically, this phenomenon also leads to an increase in the inventory of available rentals – something still in high demand.
The Local Picture
According to a recent release by the National Association of Realtors, Northwest Arkansas is among one of the top 10 housing markets in the country – this region was beat out only by Atlanta, Raleigh, and Dallas.
NAR selected the top 10 real estate markets to watch in 2023 based on how they compared to the national average on the following economic indicators: 1) better housing affordability; 2) greater numbers of renters who can afford to buy a median-priced home; 3) stronger job growth; 4) faster growth of information industry jobs; 5) higher shares of the information industry in the respective local GDPs; 6) migration gains; 7) shares of workers teleworking; 8) faster population growth; 9) faster growth of active housing inventory; and 10) smaller housing shortages.
Lawrence Yun, NAR chief economist and senior vice president of research, for the National Association of Realtors, states, "Half of the country may experience small price gains, while the other half may see slight price declines.” Yun expects rent prices to rise 5% in 2023, following a 7% increase in 2022. He predicts foreclosure rates will remain at historically low levels in 2023, comprising less than 1% of all mortgages
"The demand for housing continues to outpace supply," Yun said. "The economic conditions in place in the top 10 U.S. markets, all of which are located in the South, provide the support for home prices to climb by at least 5% in 2023."
The bottom line: the housing market is unlikely to be catastrophic like it was in the last recession, and is expected to rebound much more quickly. There’s still ample demand for anyone building both single and multi-family homes in Northwest Arkansas.
Interested in discussing a renovation or new construction with our residential architect? Contact us, or reach out directly to our Residential Architect, Wendy Staten.