The housing market has a bit of Dr. Jekyll Mr. Hyde moment.
On the one hand, buyers are finally getting some relief from the skyrocketing prices and breakneck selling speeds of the past two years. On the other hand, mortgage rates are skyrocketing — reducing affordability and keeping potential sellers on the sidelines.
The result is a market that is better for some, worse for others, and truly ideal for no one.
As Nik Shah, CEO of Home.com, puts it, “Buyers and sellers will both endure a tough fall housing market.”
He’s not wrong – but what exactly does “tough” look like? And will things get better or worse over time? Here’s a look at what’s in store for homebuilding this fall.
Moderating home prices
Property prices have risen sharply since the first months of the pandemic. According to the US Census Bureau, the median home price in the second quarter of 2020 was just $322,000. Earlier this year, it had surpassed $440,000 — an increase of nearly 37% in less than two years.
Fortunately, price growth appears to be slowing. House prices increased by 14% between September 2021 and September 2022, compared to the 18% annual increase in June.
According to real estate experts, annual price growth should slow even further towards the end of 2022. However, price declines are unlikely to be in sight – at least for the next few months.
As Jonathan Miller, CEO of valuation firm Miller Samuel Inc., explains, home prices tend to “lock up on the downside” — meaning they take longer to fall than they take to rise.
“Buyers need to be patient,” says Miller. “Sellers have been in the driver’s seat and some more during the pandemic and need time to adjust to market conditions.”
As sellers face reality, price growth will slow more quickly and could even slow down next year. According to Moody’s Analytics, prices could fall by as much as 15% over the next few years from their peak in 2022.
High mortgage rates
While lower rates are certainly something to look forward to, in the meantime, buyers have another challenge to contend with: much higher mortgage rates. The average interest rate on 30-year mortgage loans is now over 6.5% – more than double what it was last year. According to some forecasts, rates could reach up to 8% by the end of the year.
“With the Fed still working to bring inflation back down, all indications are that short-term rates will continue to rise, putting upward pressure on longer-term rates like mortgage rates,” said Danielle Hale, chief economist at Realtor.com. “This will mean that the cost of getting a mortgage is likely to continue to rise.”
Those are worrying words given how badly recent rate hikes have already hurt affordability. For a home at the average price, the typical monthly payment is now up over 70% — or about $900 — compared to a year ago.
“Buyers have many hurdles to overcome,” said Daryl Fairweather, chief economist at real estate brokerage Redfin. “It’s going to be easy to get an offer on a house, but a lot of people just can’t get past the point where they can afford the mortgage.”
A slower housing market
Higher costs are forcing some buyers out of the market and setting the stage for a much slower (and less competitive) decline.
Just look at recent home sales for proof. In August, the number of homes sold was down a whopping 20% year-over-year. And last month, properties were on the market a full week longer than last September.
“The frenzy is going away,” said Jean Lewis, an agent at HomeLight in St. Louis. “Houses are on the market for more than a few days. Buyers aren’t competing with as many other offerings, and we’re seeing some price drops.”
Even bidding wars have fallen by the wayside. According to Redfin, just four in 10 buyers faced a bidding war in August — the smallest proportion since early 2020.
It gives buyers some much-needed breathing space – both during house searches and at the negotiating table.
“Shoppers can expect to have more time to think about a purchase without necessarily falling behind,” said Cristian DeRitis, deputy chief economist at Moody’s Analytics.
That was unthinkable a few months ago, when waiting more than a day or two was basically a kiss of death.
It’s also a trend that’s likely to continue, especially if mortgage rates continue to rise. According to a survey by Zillow and The Harris Poll, more than two-thirds of potential homebuyers say they would stop looking if interest rates hit 7%. Should that happen, competition would drop even further, giving buyers more power – and even more time to find a home.
As Paul Reddam, a Compass agent in Austin, Texas, explains, “Aside from the pressure of rising interest rates” – and this is a big “sideline” – “buyers can expect a near-perfect market, with more homes to choose from, less competition, more time to think about their decisions and the opportunity to negotiate the price.”
More House For Sale (But Still Not Enough)
The low supply has long plagued the housing market. And while that shortage hasn’t exactly been resolved, the slower market has allowed inventory to build up, giving buyers more options when it comes to home buying.
The total active housing stock is up 27% compared to last September. And on any given day in the last month, there were about 155,000 homes for sale across the country.
“There’s about five houses for four that you might have seen for sale this time last year,” says Hale.
While that’s a “notable improvement,” she says, it’s more indicative of lower demand than increased supply. In fact, new listings — the number of homes just put on the market — fell 14% in September.
If rates continue their way above 6%, inventories will only get tighter.
“High mortgage rates will make housing affordability worse and negatively impact homebuyer demand,” Shah said. “However, high mortgage rates could have an even bigger impact on home sellers.”
Higher mortgage rates are keeping many sellers from listing – particularly those holding one of the record-low interest rates on offer in early 2021. Currently, about 85% of mortgage holders have an interest rate below 5% and almost a quarter have rates below 3%. For these homeowners, selling could mean buying again—and paying—at a much higher price.
“We’re seeing an expansion in supply, but it remains unusually low,” Miller says. “Sellers remain uncertain about the future of the market and are deeply attached to the record-low interest rates they have been able to refinance or buy in a pandemic era.”
Looking further ahead: a period of “inactivity”
The result could be a total slowdown on both sides of the equation.
Homeowners, at least those not forced to sell due to job changes or other necessities, would be locked into their existing homes and wait for interest rates to fall. At the same time, buyers would continue to achieve discounts as they could not afford the higher payments that come with rising interest rates.
According to Grant Cardone, CEO of Cardone Enterprises and longtime real estate investor, such a scenario could materialize if the Federal Reserve hikes interest rates at the next two meetings as announced.
“This will put housing construction into the biggest cycle of inactivity we’ve seen in 20 years,” he says.
Only time will tell, but one thing is certain: The housing market is changing, and what the Fed does over the next several months — and where it sends mortgage rates — will determine much of its trajectory.
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