As Prices Persist, Affordability Takes a Hit

While the housing market of 2022 will be remembered for its dramatic highs and lows on a national scale, these historic swings were amplified more so in distinct regional and local markets. The South Dakota market is a prime example where median listing prices more than doubled growth rates in national housing prices throughout 2022 – even after accounting for inflation effects, listing prices in South Dakota grew 17.4% annually, compared to 5.0% on the national level. This, paired with a staggering 100% increase in mortgage rates – from record lows of 3% in Q4 2021 to nearly 7% by the end of Q4 2022 – resulted in reduced affordability rates for South Dakota homebuyers for the first time since 2018, compared to 2021 at the national level. Highlighting the dynamics of Q4 2022 illustrate the extreme shifts in the housing market as we move into 2023.

The number of building permits issued is a critical indicator of housing affordability as it reflects the demand for new homes. Since the onset of the pandemic, coinciding with the rise in remote work, the number new building permits in South Dakota has grown at a faster rate than nationally. Year-to-year growth rates from the first three quarters of 2022 averaged 44.6%, compared to 0.8% at the national level. Rising interest rates were associated with an abrupt reversal in the fourth quarter, though and the number of building permits issued in the fourth quarter was -45.6% below that of Q4 2021. At the national level, incorporating Q4 2022 data was enough to entirely wipe out average gains made in the first three quarters of the year – an annual decline of 4.9% from 2021 to 2022 in the number of building permits authorized.

Housing Summary and Forecast

The limited supply of existing housing — as measured by new home listings — in recent years has been one of several factors driving the recent increase in building permits. Prior to 2020, South Dakota saw modest gains in the supply of existing housing – 0.7% and 4.3% annual increases in 2018 and 2019, respectively, while the US, in general, has seen available housing decrease since 2017. Evaluating more recent housing supply constraints, from Q4 2021 to Q4 2022 new listings decreased 10.4%. To dissect the most recent data, November 2022 and December 2022 new listings were down 13.5% and 20.0%, respectively, from their numbers a year earlier while October 2022 was down only 2.0% — also where mortgage rates peaked (rates reached 7.1% October 27th). With the uncertainty surrounding interest rate hikes and as most homeowners hold mortgages with rates below 5%, do not expect the supply of existing housing to increase as we move through 2023.

Strong demand, as well as the fewer new listings, has continued to place upward pressure on listing prices throughout much of 2022. Most notably, median listing prices in SD were 17.3% higher in Q3 2022 than the year prior, and list prices in Q4 2022 were 20.4% higher than during the same period a year prior. Given the large increase in mortgage rates in Q4 2022. This growth illustrates the strength and resilience of the SD housing market. The monthly data from Q4 2022 provide additional evidence of resilience as well. Median listing prices initially fell 0.3% from September 2022 to November 2022, but median list prices ended up 2.1% higher year-over-year in December 2022 at record highs. Although mortgage rates have come down from their highs of 7.1% in October 2022 to 6.4% as of March 2023, listing prices will largely depend on whether the Federal Reserve follows through on announced rate hikes throughout 2023.

South Dakota and US Housing Affordability

Monthly Affordability Index

Prices are often used as the most salient data point to evaluate affordability in the housing market. Others may rely on evaluating mortgage rates or even how wages are changing to make homeownership decisions. Affordability indices incorporate these measures to evaluate the individual components as a whole. A value of 100 in our Affordability Index indicates a monthly income large enough to satisfy the “28% rule” of mortgage lending. A value larger than 100 indicates housing is more affordable with respect to housing prices, mortgage rates, and income, while a value less than 100 indicates less affordable housing, or a riskier mortgage. Prior to 2022, single-family housing in South Dakota was becoming more affordable relative to the nation. But in the wake of the pandemic, SD saw record increases in housing prices and affordability fell dramatically from an annual index value of 199 in 2021 to an ending index of 128 for 2022; however, while SD has seen larger declines in terms of growth rates, we end the year with housing more affordable in SD relative to the national market. While prices remain steady, indicating potential homebuyers are ready and waiting, the largely uncertain feature will be the future path of mortgage rates.