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The great housing market ‘reset’ of 2022: The year the Fed had no mercy

What did 2022 mean for Utah’s housing market, and where do we go from here?

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Scotty Fletcher, left, and his partner Joseph Branca hang out in their living room in the apartment they rent in Salt Lake City on Thursday, Dec. 29, 2022.

Ben B. Braun, Deseret News

Imagine earning over $100,000 a year and being qualified to buy a half-million-dollar home — but still not being able to swing it.

In 2022, that was Joseph Branca’s reality, along with plenty of other Utahns who wanted to join the mad dash to homeownership, but ultimately ended up walking away.

“I just felt totally iced out,” Branca said.

That’s the story of 2022. How the pandemic housing frenzy — which drove housing prices up to unimaginable levels in 2021 and into early 2022, especially in Western states like Idaho and Utah — came to a grinding halt mid year, and the market crashed down to reality.

It was a year in which a boiling hot housing market saw “historic deterioration,” as Fortune put it. The market was suddenly plunged into ice cold water when the Federal Reserve’s war with record levels of inflation sent mortgage rates skyward, and the mask that helped drive home prices so high suddenly lifted. That’s when buyers found their affordability ceiling.

The music stopped. The lights shut off. The party was over.

“The cops came,” quipped Dejan Eskic, senior research fellow at the University of Utah’s Kem C. Gardner Policy Institute, one of Utah’s leading housing experts. “The cops came and busted everyone.”

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Homes are under construction in South Jordan on Wednesday, Dec. 21, 2022.

Scott G Winterton, Deseret News

The year of the Fed

Utah’s housing experts continue to shy away from the word “crash,” since what happened in 2022 is still nothing like what happened after the 2006 housing bubble popped. But high mortgage rates, some weeks hovering over 7%, did trigger a type of collapse — in demand and sales. Prices, though they’re on a downward trajectory, are still up year over year by single-digit percentages — at least for now.

“I like the word contraction better than collapse,” said Jim Wood, director of research and science and the Ivory-Boyer senior fellow at the Kem C. Gardner Institute. The best way to describe it, he said, is an “abrupt contraction” that’s had a dramatic effect on all aspects of the market, but especially on homebuilding, which he and Eskic worry will exacerbate Utah’s housing shortage long term.

To Eskic, 2022 was the “year of the Fed.” In his mind, it was a “federal miscalculation” to raise borrowing rates so high and so fast after two runaway years. In early 2022, “momentum was slowing” from 2021, but then “the faucet just got turned off.”

“2021 was on fire, and in 2022 it’s an empty concert hall,” he said. If rates had risen to around 4.5%, “the train would still go. It would slow, but it wouldn’t be stopped like it is now.”

Wood interjected, saying he’s “got to defend the Fed. If they hadn’t been so aggressive in 2020 and 2021, we’d be talking about unemployment now rather than inflation.” He also noted it was really Congress that juiced the economy with so much one-time stimulus money, not the Fed.

A home is listed for sale in West Jordan on Wednesday, Dec. 21, 2022.

A home is listed for sale in West Jordan on Wednesday, Dec. 21, 2022.

Scott G Winterton, Deseret News

The year of the reset

While 2021 was the year of the “shocking” home price, 2022 was “the year of the reset,” said Steve Perry, president of the Salt Lake Board of Realtors.

Sellers could no longer “do whatever they wanted,” Perry said, and suddenly buyers had more options — at least those who could still afford to buy.

After prices peaked in May, Salt Lake County’s median single family home price hit $650,000. As of November, that figure was down to $569,000 — 14% lower than the May peak but still 4% higher than in November of 2021.

“That’s a good thing, because they were overpriced anyway, right?” Perry said. “They climbed up so high so fast. (Now) it’s resetting, it’s balancing, it’s coming down.”

So where does that leave buyers?

If you ask Perry, they have a silver lining. Gone are the days of brutal competition. In 2021, buyers were “getting raked over the coals, having to give a year’s supply of pizza with their offer.” That’s not hyperbole, he said. Buyers were actually offering pizza, cookies, even Utah Jazz tickets to literally sweeten the deal, “all kinds of crazy stuff” that real estate agents had to make sure to handle correctly.

After a long, over two-year frenzy, Perry said buyers had more breathing room to negotiate prices and complete their due diligence. That is, after a summer of “twist and turns,” when prices peaked, interest rates went sky high, buyers were shocked out of the market, and sellers were saying, “Wait, how come we’re not selling the home in two days? Why is it taking two weeks, a month, six weeks?”

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Joseph Branca, left, makes a drink while his partner Scotty Fletcher makes dinner at their apartment they rent in Salt Lake City on Thursday, Dec. 29, 2022.

Ben B. Braun, Deseret News

Buyers ‘iced out’

If you ask Branca, 2022 definitely wasn’t the year for buyers either. It was the year that put homeownership far out of reach.

Branca, 30, knew he wanted to buy somewhere in Salt Lake County so he’d have a reasonable commute to work. He’s employed as a professional actor and director of marketing and advertising at Hale Center Theater Orem, as well as director of communications at the Salt Lake Acting Company.

When he first started looking in November 2021 and into early 2022, Salt Lake County’s median single-family home price had hit $580,000, up 24% from a year earlier, according to the Salt Lake Board of Realtors.

So Branca wasn’t expecting to buy his dream home. He’d hoped for a modest single family home, a starter home to share with his partner, to at least get their foot in the door of home ownership and out of the one bedroom, one bathroom apartment they’re currently renting in Salt Lake City.

In the beginning, Branca said his home hunt was “exciting, kind of frenzied, certainly, but still manageable. Still seemed achievable.” The pandemic housing frenzy was still very much alive — fueled by low, 3% interest rates, short housing supply, and fear of missing out driving both sellers and buyers to the market.

Then everything changed. By April, mortgage rates had begun shooting up. And to Branca, that meant home ownership became completely “inaccessible.”

With a $105,000 annual income, Branca said he was approved to buy a $550,000 home. But when mortgage rates ticked up, he said it quickly became apparent that he wasn’t going to be able to buy a home with, say, a $1,600 monthly mortgage payment. Instead, he was actually looking at a mortgage payment of up to $4,200 a month, depending on the day’s rate.

“It completely snowballed out of control.”

That $4,200 monthly payment would have been for a home on the very upper end of his budget, Branca said, and “never one that I was actually considering, but certainly one that I should have been able to consider. Like, they were not outrageous houses or homes that would have been that (price) five or 10 years ago.”

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Scotty Fletcher, left, and his partner Joseph Branca pose for a photo in their apartment they rent in Salt Lake City on Thursday, Dec. 29, 2022.

Ben B. Braun, Deseret News

So Branca said he made the decision to back out of the market, hoping to maybe consider buying again when interest rates and potentially prices come down. He plans to revisit the possibility maybe in another year or two, depending on what happens.

Branca said he’s struck by how “wild” today’s home buying reality is. When he thinks about what his parents’ life was like in the same window of time in their lives, he said it blows his mind.

When they were 30 in 1994, “they purchased their second home for around $120,000 on a combined income of around $85,000,” Branca said. The home was 2,500 square feet, four bedrooms, two and a half bathrooms, sat on a quarter acre lot, and they “lived well within their means” on a $1,000 a month mortgage payment.

“Comparatively speaking, I make more money than my parents combined income at my age and still can’t afford to buy something at a significantly lower quality than what they were able to purchase at that same age,” Branca said.

Branca said if someone like him is struggling to buy, he can’t imagine what it’s like for people living on lower incomes.

“It just seems so odd to be in such a comfortable position and not have that as a practical option. When you look around at those who are not in as comfortable of a position, well, what options do they have at all?”

Branca said he’s grateful that he’s employed, has a handsome income, and while he’s “sad” that the market was so difficult to navigate for his situation, “it felt much worse to realize” just how many other Utahns the market has priced out.

By Eskic’s calculations, 79% of Utah households couldn’t afford the state’s median priced home as of the third quarter of 2022.

2023 housing market predictions

Where do we go from here? Housing market predictions for 2023 vary, depending on the regional market and who you talk to, but no one is predicting a stellar year for buyers or sellers — and certainly not for homebuilders.

Nationwide, housing pandemic hot spots in the West have been among the first to see sale prices slashed. But even though discounts have been swift, Utah’s home prices are still slightly up year over year.

Eskic, however, is predicting Utah home prices will drop 9% year over year in 2023. Peak-to-trough, with the peak being May 2022, he expects prices to decline by a percentage somewhere in the teens, depending on what happens with interest rates over coming months.

But Wood is more bullish than Eskic. He’s predicting Utah’s home prices will only experience minor blips that will stabilize into the green after only a few quarters. Historically, even if the nation experiences economic troubles, Wood said Utah’s strong employment economy typically makes the state resilient.

“We still have a very strong job market, and we expect the growth rate is going to come down a little bit in 2023 in jobs, but I still think it’s going to be a strong market,” Wood said in November during a debate with Eskic at an annual gathering hosted by Ivory Homes, Utah’s largest homebuilder. “So unless we have a real serious recession, I think prices have some support given our economy.”

While neither Wood nor Eskic are predicting a catastrophic, 2007-like crash, they do expect 2023 to be a challenging year, especially for homebuilders that leaned hard into speculative building in 2021.

“Then the rates hit and they were left holding the bag,” Eskic said.

“So (many have) stopped new construction ... and consequently we’ve seen new production just fall off,” Wood said. “It’s falling off faster than we thought it would.”

Wood and Eskic expect a staggering 40% to 50% drop in the number of new homes produced in Utah over the next two years. That’s not good news for affordability or Utah’s housing shortage, which they calculate hit 31,000 units after the big home building boom of 2021.

Over the next 12 to 18 months, Eskic said he expects homebuilders to offer “big discounts.” Not necessarily dramatic price drops, but more buyer incentives and rate buydowns, perhaps offers to finish basements.

“So you’ll find the deals with the homebuilders, but you’re not going to find the deals on (existing) homes,” Eskic said.

Nationwide, an increasing number of firms have downgraded their forecasts and predict U.S. home prices will continue to fall in 2023, Fortune has reported.

The National Association of Realtors, however, is predicting 2023 will be a year the market will “regain normalcy,” expecting mortgage rates to stabilize, home sales to sag and prices to moderate.

However, like we saw during the pandemic housing frenzy, that could all vary depending on the region.

“After a big boom over the past two years, there will essentially be no change nationally” in home prices in 2023, said the National Association of Realtors chief economist Lawrence Yun. “Half of the country may experience small price gains, while the other half may see slight price declines.”