Demographic Shifts and Inventory Shortages Signal Recovery in

New-Home Market

Between April and May, new home sales increased by 14.5% in the Salt Lake region and 44.1% from the previous year.

By Dejan Eskic Chief Economist, Salt Lake Board of Realtors®

Fortune Magazine recently published an article with a headline that intrigued readers: “Is the housing market recession truly over in the new-home space?” After years of gloomy predictions, it’s time to evaluate whether the housing recession was as severe as portrayed and if recovery is indeed underway. However, in an environment where mortgage rates hover around 7%, and the median monthly payment in Utah has surged by 17% from last year and 61% from two years ago, one might question how this recovery is possible. The answer lies in the interplay of demographic tailwinds and a lack of inventory. Let’s dive deeper into the matter.

Sharp Decline in Prices and Subsequent Rebound

Utah witnessed the steepest decline in real estate prices in its history from May 2022 to January 2023. In just eight months, the median sales price of existing homes across the state plummeted 15.7%, falling from $540,000 in May 2022 to $455,000 in January 2023. In Salt Lake County, the median price fell from $560,000 in May 2022 to $480,000 in December 2022. This decline stands unparalleled in comparison to the short-term drops experienced during the Great Recession or the 1980s. The primary cause of this decline was the rising interest rates, which surged from 3.76% in March 2022 to 6.48% in January 2023. However, as the weather warmed, Utah’s housing market began to recover. Since January, prices have rebounded, witnessing an increase of 7.7% to reach $490,000 by May.

Moreover, the median days-on-market have decreased significantly from nearly 7.5 weeks in January to approximately three weeks. However, while prices have shown signs of recovery, sales activity is still trying to catch up.

Inventory Scarcity Drives Price Acceleration

The scarcity of existing inventory has been the most significant contributing factor to the recent price acceleration. In May, for every one home sold, only two new listings became active on UtahRealEstate. com, a considerable decline from January’s ratio of four new listings for every sale. To provide context, the preCOVID ratio was 2.3 active listings for every sale. The lack of existing inventory is expected to persist in Utah due to nearly 75% of existing residential mortgages being locked in at a 4% or lower interest rate, with approximately 34% below 3% as of Q4 2022. In this market, move-up buyers, leveraging significant equity from their existing homes, are the only ones able to proactively transact. However, due to the scarcity of existing inventory, many buyers are turning to the newconstruction market, which is precisely why economists are optimistic about the recession’s end.

Builders’ Incentives Drive New Construction

Homebuilders have introduced appealing incentives for buyers, including rate buy-downs, free upgrades, and price drops, which have exceeded expectations for the spring season. Notably, a surge in sales was experienced in May. Sales data from Zonda reveals that the Greater Salt Lake market led the nation in new-home sales recovery, with a 14.5% increase in new home sales between April and May and a significant 44.1% increase from the previous year. However, despite the recovery in new home sales, new permits are declining at an annual rate of 23%, posing a challenge to the persisting housing shortage.

Worsening Housing Shortage Expected

Despite notable progress in reducing the housing shortage from 56,000 units in 2017 to 28,000 in 2022, experts anticipate a worsening shortage over the next two years. With new home production expected to decline and household formation projected to increase, Utah’s housing shortage is expected to reach 37,000 units by 2024.

Affordability Challenges to Persist

I anticipate that the housing market will navigate uncharted territory over the next two years. The limited supply of homes for sale will likely persist, as many existing homeowners enjoy low mortgage rates or have paid off their mortgages entirely. Coupled with the growing housing shortage, this situation is expected to fuel a continued upward trend in housing prices. This is particularly favorable for homebuilders. However, affordability challenges are likely to persist at their current levels unless there are significant drops in interest rates. Unfortunately, such drops are unlikely to occur in the next 24 months without major negative economic shifts. Affordability in our market has significantly worsened over the past year, as indicated by the Housing Opportunity Index (HOI) published by The National Home Builders Association and Wells Fargo. The HOI measures the proportion of homes (both new and existing) sold in a metropolitan area that would have been affordable to a family earning the local median income. In Utah’s four metropolitan areas, the HOI declined throughout 2022 but showed slight improvement in the first quarter of 2023. For instance, in the Salt Lake Metropolitan Area, the HOI dropped from 44.3 in the first quarter of 2022 (meaning the median income family could afford 44.3% of homes sold in that quarter) to 24.9 in the first quarter of 2023. In an affordable housing market, the median income family should be able to afford at least 50% of the homes sold.

Mortgage Rates to Settle in High 5% to Low 6% Range

Ultimately, the mortgage rates will heavily influence residential activity in the short term. In recent months, mortgage rates have exhibited more volatility than a penny stock in the 1980s. It is likely that the Federal Reserve has either concluded or is on the verge of concluding its rate hikes. If market volatility subsides, we can expect the mortgage rate market to narrow the significant gap between the 30-year mortgage rate and the 10-year treasury rate. As a point of reference, the historical spread between the 30-year rate and the 10-year treasury has averaged 165 basis points. From late May to mid-June, that spread ranged between 280 to 313 basis points. Therefore, in a less volatile environment, even with the 10-year treasury in the high 3s, we should anticipate mortgage rates settling in the high-5% to low-6% range.

2023 RPAC Golf Tournament

The annual RPAC Golf Tournament was held June 23 at the Thanksgiving Point Golf Club. Roughly 150 members took part in 18 holes of golf and a catered lunch. Thank you to our many sponsors of this year’s event: UtahRealEstate.com, Utah Rental Housing Association, Ridge Home Loans, Fieldstone Homes, Salt Lake Home Builders Association, Southtowne Mortgage, Mountain America Credit Union, Majestic Home Warranty, Meth Mob, Real Property Management, Union Home Mortgage, Pillar to Post, Utah Association of Realtors®, Millcreek Commercial, and Sandberg Sign and Design.