Summer 2022 has drawn to a close. The pace of U.S. home sales has slowed for most of the year. The issue? It’s the prices. Many hopeful buyers are still waiting for real housing affordability.
Just as we find light at the end of the tunnel, mortgage interest rates for borrowers are over 6%. Maybe that’s not high in the grand scheme of things. Some boomers bought when rates were in the double digits. But the speed of the current rise is amazing.
Here’s Lance Lambert of Fortune magazine on Twitter this week:
The average 30-year fixed mortgage rate moves up to 6.87%. This is getting pretty close to a 1981-level mortgage rate shock.
And with homes so darned expensive (and property taxes soaring right along with them), the current mortgage rate spike is certainly spooking buyers.
Buy the Dip? Reasons Home Prices Could Fall
The Federal Reserve is on a roll with its interest rate hikes. Indirectly, the Fed’s activities are pushing up mortgage rates, causing buyers to lose enthusiasm. The Federal Reserve knows this. It wants the hot housing market to cool off.
At the same time, the Fed’s rate hikes are impacting businesses. Companies, too, want to be able to borrow at decent rates. When business growth slows, so does the stock market. Working people are now quite concerned about their dwindling 401k accounts. Retirees are watching their IRAs droop. No wonder home-buying enthusiasm has dampened.
Prices are still sky-high in Los Angeles and Seattle. But buyers are getting chances to negotiate prices in Sacramento, and in Medford, Oregon. And prices are flat-out falling in the Midwest.
☛ Where’s the best region to buy a home now? In these six cities, home buyers might finally get a fair deal.
In markets where prices are coming down, a home purchase can make good sense. Loan applicants with strong credit profiles can shoot for the lowest available mortgage rates — before mortgages cost even more. As the Federal Reserve says it’s nowhere near ready to stop the hikes, mortgage interest rates will likely keep rising. If so, it’s a good time to shop around for rates, and see what financing is available now.
Important: It’s not just the down payment and mortgage that make up a home purchase. There are also closing costs. The costs can exceed 10% of the home’s price. Loan applicants need to discuss them with the mortgage company and get an idea of the big picture.
Fannie Mae Expects Markets to Chill Through 2023
There’s been a lot of talk that houses are overpriced, and a lot of speculation as to whether those values will come down. After all, too many hopeful buyers just don’t have the funds for this market. Aware of the stall in home building and buying, loan backer Fannie Mae has lowered its market forecast through the rest of 2023.
And Fannie Mae isn’t the only one. A number of forecasts from economic research groups, including Moody’s, say the market “correction” (a.k.a. slump) will continue through 2023 and beyond.
Of course, not everyone is looking to buy in a market where prices are coming down. And it’s a big problem that just as prices are beginning to ease, the Fed is ratcheting up the cost of mortgages.
Especially for the pricey coastal cities, here’s the key equation:
Rising mortgage rates
+ elevated home prices
= the buyer’s monthly mortgage payments are up 50% in 2023.
That’s just phenomenal.
And prices are still very high. Since the pandemic began, the housing market has gone up a remarkable 43%. And it’s still going up, although not so fast. This year’s median price for a home sale is 7.7% over last year’s.
Fed Pushes Mortgage Costs Higher—On Purpose
Jerome Powell, the Federal Reserve chair, has said that a rise in mortgage rates would throw cold water on the hot housing market of the pandemic. Powell called it a market reset, made it happen, and welcomed it.
But what does it all mean for the ordinary home buyer?
Is the reset meant to let the supply rise up to meet the demand?
Could a reset mean housing prices come down to Earth?
First, keep in mind that Chair Powell has no mandate to support affordability in housing. Under federal law, the U.S. central bank’s job is to keep employment numbers up, and keep inflation numbers down. Odd as it may seem, the Fed — the Central Bank of the United States — does not have to ease the plight of millions of frustrated people who want and need to buy homes, but can’t.
Dangerous Game: How “Inflation-Fighting Playbook” Manipulates Home Buyers
The Fed’s “inflation-fighting playbook” has six steps, according to Fortune magazine:
- The Fed hikes interest rates.
- Home buyers step back, leaving homes on the market.
- Homebuilders slow down.
- Demand for lumber, steel, appliances, and other supplies decreases.
- A general pullback in consumer demand follows.
- Inflation cools.
We are, evidently, at Step 5. Rates are up. Hopeful home buyers are demoralized. Builders are leaving homes unfinished, as construction workers leave to find work in higher-paying fields.
And yes, the demand for commodities like lumber is indeed cooling off. Same with paint, appliances, and windows.
But inflation is stubborn. The current rate of inflation is above 8%. The Fed now believes it can finally press it back down to 2% by 2025. How? The Federal Reserve says it will keep ratcheting up interest rates more than it thought it would have to. Jerome Powell says the Fed will do whatever it takes in 2023 to get the upper hand over inflation. Don’t expect the Fed to ease rates until 2024.
It’s a dangerous game. If the Fed overdoes it, the housing market could take a nosedive. We might beat inflation only to put the country into a deep recession and home building into a deep freeze. Things could get even harder for hopeful buyers if a full-blown recession sets in.
Will Current Owners Take a Hit on Their Property Values?
Price growth is stalling out. People aren’t eagerly snapping up new homes the day they’re listed. Homes are staying on the market, on average, for 16-17 days.
Relative to past decades, homes are still selling fairly quickly. Remember those pre-pandemic days, when the typical house for sale stayed on the real estate websites for a month?
So there’s a limit to the supply of homes for sale. And that will head off a major decline in property values.
We know building is slowing down. But there’s another big reason for the restricted housing supply. Homeowners who got super-low mortgage rates in 2021-2022 aren’t rushing to sell now. They’d like to hang onto their 3% and 4% mortgages, thank you.
In short, the current economic research shows no reason for homeowners to panic about severe drops in property values.
That said, the real estate market surge of 2021-22 has run its course, and the real estate slowdown is here. What brings us this spooky season? It’s mainly the Fed.
David French for Reuters.com: Wall Street Slumps as Investors Absorb Hawkish Fed Rate Message (Sep. 21, 2022).
Lucia Mutikani for Reuters.com: U.S. Home Sales Drop for Seventh Straight Month, House Price Growth Cooling (Sep. 21, 2022).
Lance Lambert for Fortune.com: The Fed to Reset the U.S. Housing Market Through a “Difficult Correction” — Five Things to Know About the Plan (Sep. 22, 2022).
Lance Lambert for Fortune.com: We’re Entering the Next Stage of the Housing Market Downturn — Three Things to Expect Heading Forward (Sep. 18, 2022).
And as linked.
Photo credits: Artie Siegal and Pavel Danilyuk, via Pexels.