Here in Charlotte, locals are already aware of how tight the housing market has become. Home prices have skyrocketed in recent years, gaining almost a full third of their current average value since 2012. For local homeowners, that’s fantastic news, especially for those who managed to ride out the 2008 housing crash waiting for their homes to regain their former value. Over that same span, however, the number of existing homes for sale here has dropped dramatically, currently hovering at less than half what it was at the beginning of 2012. The pressures on the market created by ballooning prices and dwindling supply may be finally choking off sales, and the Charlotte area may be on the cusp of a major correction.
Heading for a Cliff
The idea that a housing market correction is coming is probably unwelcome news to most homeowners, who likely remember that the last such correction turned into a rout in the market. There’s no reason to think that any coming correction will be anywhere near as extreme this time, though, since the underlying economic conditions aren’t as challenging as they were in 2008. In fact, most home price indices expect home prices here to continue to rise for at least another year. In the short-term, that may sound like more good news for local homeowners, but the reality is likely to be more complex. As it turns out, historical data indicates that housing markets with the highest home price to median income ratio tend to suffer the most in a downturn, and that’s not a good sign for us here in Charlotte.
The High Cost of High Prices
If you look at a listing of cities with the worst home price to income ratios in the country, you won’t see Charlotte making an appearance. That oversight isn’t due to the Charlotte area having a healthy market, of course, but rather that most data sets tend to focus on only the largest metro areas. If you do the math, however, you’ll find that with an average household income of $53,274 and a median home list price of $289,900, the Charlotte area sports a ratio of 5.4. In other words, it’s just as unaffordable here as it is for those living in New York or Denver. What that also means is that home prices are much higher than the market here can support over the longer term, so a pretty significant dropoff is inevitable sooner or later.
A Sneak Preview
Although the Charlotte housing market isn’t cooling yet, we are almost certainly approaching a peak. After that happens, if history is a guide, owners will rush to sell, precipitating a steep decline in a short span. If you want to see what that looks like in a similar environment, consider Australia. Although it’s on the other side of the world, there are some parallels that make for a useful comparison. For example, the housing market there (nationwide), reached a similar price to income ratio as we have here in 2020. That puts them about one year ahead of Charlotte in terms of the market cycle. Today, the Australian market is in decline almost nationwide, with no signs of leveling off, according to Business Insider.
What’s most important, though, is what preceded the dropoff – both the volume of new listings and demand for property stagnated right before the downturn.
Timing the Market
If the present conditions here in Charlotte are any indication, any homeowner looking to cash out and sell off their property should get the ball rolling as soon as they are able. Those that don’t may well become trapped in the spiral of falling prices that will accompany the coming correction. That’s fine if you’re willing to wait for prices to recover, but there’s no telling how long that will take. There’s also no way to forecast how steep the decline will be once it begins. If you use the Australian market as a barometer, it could be reasonable to expect at least a 12% to 18% decline in home prices before the market begins to stabilize, spread over at least two or three years.
The bottom line for Charlotte homeowners is: the years of price inflation are almost over – and if you’re planning to sell, you’re running out of time unless you’re willing to take a significant loss.
