After the COVID-19 pandemic stirred “unmatched volatility” in the Utah housing market — joining the Great Recession “as one of those unique moments” in the state’s history — the aftereffects are spelling trouble for its real estate market and home affordability.

“The Great Recession produced 16 consecutive quarters of declining housing prices, while the pandemic produced the shortest and steepest homebuilding expansion and contraction on record.”

That’s what Utah’s leading housing experts wrote in a new report titled the “State of the State’s Housing Market.” Jim Wood and Dejan Eskic, researchers at the University of Utah’s Kem C. Gardner Policy Institute, published the report Wednesday. They looked back on the wild pandemic years, while also looking ahead to what’s next.

One of the report’s biggest takeaways is the state’s housing shortage is about to get worse. The national housing market correction underway now is likely to have lasting impacts on the Utah housing market by erasing recent years’ progress on closing the gap between the state’s growth and the number of new residential units being built.

That means the housing shortage is likely to persist for “the remainder of the decade,” Eskic said Wednesday at a panel hosted by the Kem C. Gardner Institute to discuss the report’s findings.

It will have continuing consequences for Utah’s affordable housing problems, which have risen to unprecedented heights amid high mortgage interest rates that are now hovering over 7%.

“Utah faces the most unaffordable market in its history,” Eskic said. And that goes for the rest of the country, too. “August will likely go down as the most unaffordable housing market in our nation’s history.”

Finalizing this year’s report was no easy task for Wood and Eskic, especially because of the difficulty in making predictions amid today’s volatile mortgage rate environment.

Eskic put it this way in a recent interview with the Deseret News: “It’s a really uncomfortable year.” He turned to Wood, who was also on the Zoom call, and asked, “How many times did we change our forecast within like a three- or four-week period? Like almost every other day.”

Wood chuckled. “The forecast is so subject to change,” he said.

“It’s been such a volatile market,” Eskic said. “And I feel like everybody feels this way nationally.”

Although Utah’s housing market fundamentals remain generally “strong,” the researchers prediction that its stubborn housing shortage is likely to increase heading into 2024 will strain aspiring homebuyers. High interest rates did spur a market contraction and a price correction, but not enough to make homes more affordable for many priced-out Utahns. Mortgage rates are expected to taper slightly in 2024 but remain relatively high. Meanwhile, home prices are also expected to increase next year.

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The word “crash” did not appear in this year’s report, signaling what Utah housing experts have been saying all along. While the pandemic housing rush did bring an unseen level of volatility and “whiplash” to homebuilders, they’re still not predicting a 2008-like crash due to the state’s generally strong economy, its continued growth and a housing shortage that’s now poised to grow.

However, “demographic and economic growth are forecast to slow slightly in 2023 and 2024,” the researchers wrote. “Net in-migration will likely edge lower due to high housing  costs, fewer remote workers, and slower job growth. Employment growth will fall around 2%, the lowest level since the Great Recession (except for the pandemic year of 2020).”

Overall, “A weaker economic environment will add to Utah’s homebuilding and real estate challenges.”

Top takeaways from the report

Utah’s 10-year homebuilding and real estate boom came to an abrupt end in 2022. After mortgage rates began to rise rapidly near the end of 2022, undercutting buyer demand, the year-over-year number of residential units receiving building permits plummeted by 35% from April to December, sales of existing homes fell 23%, and the median price of a home fell by 10%.

Interest rates are giving homebuilders whiplash. The Federal Reserve’s monetary policy affected all types of residential construction, though single-family home construction was hardest hit with a 32% drop in building permits in 2022. Apartments declined by 27%, and condominiums, townhomes and twin home permits dropped 9.5%. That contraction continued through the second quarter of 2023. Through June, the year-over-year number of residential units receiving building permits in Utah fell 37%, existing homes sales fell 20%, and the median sales price fell by 7.5%.

Only four states — Montana, New York, Wyoming and Alaska — saw sharper declines.

Utah’s housing shortage is likely to increase by 2024. During a building boom, Utah made up significant ground on its housing shortage, shrinking the gap from 56,800 units in 2017 to 28,400 units in 2022. However now as homebuilding activity is expected to contract, “new households will outnumber new housing units. Consequently, the housing shortage will likely increase to over 37,000 units by 2024.

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Housing price increases peaked in 2022, then slowed and declined in 2023. Utah’s year-over-year median sales price of a home peaked in February 2022 with a record 28.2% increase. But over the next 10 months, price increases slowed, and eventually fell to 1.1% by December before turning negative in January with a decline of 5.3%. Declines continued through the first four months of 2023, reaching 10.3% in April. By July, however, the year-over-year decline narrowed to 2%.

The price correction was inevitable, but modest. The median sale price of a home in Utah went from $336,300 in February 2020 to $500,000 in February 2022. “A price increase of this magnitude (49% in 24 months — the largest two-year increase on record), requires a future price correction.” That correction came in March 2022 and continued through July 2023. “The correction, however, looks to be modest with less than a 5% decline in year-over price.” As a result, 2023 brought what appeared to be a “pause” on price increases, “likely followed by a price increase in 2024.”

Despite dip in housing prices, affordability continues to block homeownership opportunities. In the second quarter of 2023, the median income household in the Salt Lake City metro area could only afford about 21% of the homes sold in that area (an affordable housing market would mean the median income household should be able to afford 50% of homes sold). Of 241 metro areas surveyed nationally, 203 are more affordable than the Salt Lake metro area.

Housing prices in Utah increased by a striking 72% since the first quarter of 2018. Only seven other states had greater increases. However, in the first quarter of 2023, Utah saw the biggest percent decline, -4.3%, of all of the seven western states experiencing price declines amid high interest rates, according to the Federal Housing Finance Agency. While prices fell in most western states, the rest of the country has seen price gains, with 28 seeing increases of at least 5%. South Carolina had the biggest gains, with a year-over-year increase of 9.5%.

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Housing forecast for the rest of 2023 and 2024: “A weaker economic environment will add to Utah’s homebuilding and real estate challenges.”

Building permits in 2023 for residential units are forecasted at 22,750, “the lowest level since 2016. Sales of existing homes are also likely to fall to 37,500 in 2023, “the lowest level since 2014.”

There is some good news, though. Both homebuilding activity and real estate sales are expected to increase in 2024. It appears the decline in home prices is “near bottom,” while year-over-year increases are likely in the third and fourth quarters. Home prices are expected to dip only slightly this year, with a 2023 forecast of $500,000 for the median sales price, but that’s just 2% below the statewide median in 2022.

Mortgage rates are expected to also come down, but only slightly. “By year-end 2023, the mortgage rate will likely be near 7% but will trend lower in 2024 averaging 6.5% for the year.”

Overall, “little progress on housing affordability is likely as price increases return and the housing shortage grows.”

Mortgage payments increase despite a drop in housing prices. The monthly mortgage payment on the median priced home in 2021 was $2,466 and the income required to finance the mortgage was $98,640. That payment jumped to $3,648 in 2022 and $3,750 in 2023, with a required income of $150,000, up 2.8% from a year ago and a staggering 52.1% from two years ago.

“This sharp two-year increase in the cost of the median priced home precludes a growing share of households from homeownership and threatens the housing opportunities of future generations.”

Homeownership is “a fading dream” for many renters. “Only 15% of Utah’s renter households have enough income to purchase a modestly priced $300,000 to $400,000 home.” There doesn’t appear to be much hope for them in the near future, as high interest rates and housing prices will “continue to exclude a growing share of renters from home ownership.”

Long-term renters will likely face a rental market marred by rising monthly payments and low vacancy rates. The average rent in Wasatch Front counties has increased at a rate of 6.5% to 7% a year since 2011, nearly double the rate of increase to the median income of renters. The average rent in Salt Lake County is now $1,570, which requires a yearly income of $60,000 to qualify.

Housing market predictions: Why there’s no crash coming

It’s tough to predict what will happen with interest rates. The Federal Reserve recently signaled it’s not done with its aggressive moves to tamp down inflation after a pause in June. People in the real estate community hope the mortgage rate will decline, but some have worried interest rates could jump to 8%. Wood is skeptical of rates going that high.

What happens in Utah’s housing market — and the national market — largely hinges on what happens to mortgage interest rates. If they dip slightly, that could help stabilize and even increase housing market activity, but if they jump significantly that could have a chilling effect on the market.

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But looking at the big picture — Utah’s continued growth, its strong job economy, and its continued housing shortage — Wood and Eskic are confident demand for housing in Utah will remain sharp, which will therefore continue to buoy prices. Yes, mortgage rates that doubled within a year created “a sudden and unexpected shock to the housing market,” with “psychological and financial” impacts to would-be homebuyers, they wrote. But those rapid rate increases also appeared to create “short term (hopefully) distortions of demand for new and existing homes.”

“Perhaps, it is best not to interpret the impact of short-term wild swings in demand as indicators of long-term housing market conditions, particularly in the case of the housing shortage,” they wrote.

A shortage, however, is not good news for affordability.

“We’ll see sales price flat (or) maybe go down. But affordability is getting worse because of interest rates and the shortage,” Eskic said. “We’ve never had a housing recession during a housing shortage. So this is why it’s so weird.

People expect housing prices to crash and the reason they’re not is because of the shortage,” Eskic continued. “And the shortage is only going to get worse because builders aren’t going to build because they’re not going to make any money because of where interest rates are.”

Why is the housing shortage growing?

In 2021 and early 2022, homebuilders and homebuyers were enjoying low interest rates, largely because of the Federal Reserve’s reaction to the COVID-19 pandemic, driving down rates to record low levels to avoid a depression. Then, as inflation reared its head, the Federal Reserve reacted again with rapid interest rate hikes.

“Predictably, Utah’s housing market felt the full force of the Federal Reserve’s policy, both on the upside and the downside,” Wood and Eskic wrote.

Homebuilders, at first racing to meet demand in 2021, pulled back dramatically by the end of 2022. The rise in mortgage rates spurred momentum for a shift from single-family homes to higher density housing like condos and apartments.

“More high-density housing has been developed in Utah since 2021 than any other time,” Wood and Eskic wrote, with 15,000 condominium units and 24,500 apartment units receiving permits in the past two years.

But that homebuilding constriction will likely aggravate Utah’s housing shortage heading into 2024.

It’s important to note Utah’s “prolonged” housing shortage dates back to 2010, when household formation started to outnumber the construction of additional housing units, Wood and Eskic wrote. Each year, from 2010 to 2017, “the growth in households was greater than the growth in housing units, although the gap gradually declined over the seven-year period.”

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“The cumulative shortage from 2010 to 2022 totaled 28,415 housing units. This should not be interpreted as leading to 28,415 homeless households. Rather, the shortage created record low rental vacancy rates in both rental units and owner-occupied units. In other words, the shortage removed vacant units from the housing market, and created an unhealthy condition leading to higher housing prices, higher rental rates, and few housing alternatives especially for moderate to low-income households.”

In 2018, the housing shortage “began to ease as the building boom finally caught up with household growth and new housing units exceeded the number of new households,” the researchers wrote. That year, new housing units totaled 24,245, while new households totaled 23,139, reducing the housing shortage by about 1,100 units. Over the next four years, more housing was being built than new household units, shrinking the shortage to about 28,000 units.

Then 2022 came, and the mortgage rate shock hit, threatening to “undo some of this recent progress.”

“Although new housing units did exceed new households in 2022, residential construction projections indicate the five-year decline in the shortage may soon end,” Wood and Eskic wrote. “Household growth is expected to exceed housing unit growth in 2023 and 2024 by about 8,800 units. This shortfall would push the housing shortage up by 31% to 37,255 units.”

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