Today’s housing market is a poisonous mix of high mortgage rates, high prices, limited supply, and unusually strong pent-up demand — and it’s frightening off both buyers and sellers.
- IMPORTANT NOTES
- Housing prices are high, availability is limited, and interest rates are rising.
- Both buyers and sellers are scared off by the housing market.
- “A lot of people just want to sit tight and see what happens,” one real estate agent explained.
Prices were already high due to increased demand during the peak of the Covid-19 outbreak. The popular 30-year fixed mortgage rate is now around 8%, the highest in decades, making matters much more difficult. Mortgage demand has dropped to its lowest level in over 30 years. “I believe it is painful. “I think it’s ugly,” Matthew Graham, chief executive officer of Mortgage News Daily, said Thursday on CNBC’s “The Exchange.”
During the first two years of the Covid-19 epidemic, the Federal Reserve cut its key interest rate to zero and pumped money into mortgage-backed assets. As a result, mortgage rates have been at an all-time low for the past two years. This spurred a buying frenzy, which was exacerbated further by a dramatic urban migration and a new work-from-home lifestyle. Home prices increased by 40% from pre-pandemic levels. The Fed then raised interest rates as inflation rose. As a result, the housing market became even more expensive. When interest rates rise, property prices often fall.
However, unlike previous markets, this one has a significant scarcity of supply. The Great Recession of 2008 and the accompanying foreclosure crisis were extremely hard on homebuilders, pushing them to underbuild for more than a decade. They still haven’t made up the difference.
Who is being harmed by the present housing market?
Meanwhile, would-be sellers are stranded. They have no inclination to exchange their existing 3% mortgage rate for an 8% mortgage rate on a new purchase. “I don’t think anybody in my community of mortgage originators would disagree that in many ways, this is worse than the great financial crisis in terms of volume and activity,” MND’s Graham said.
He’s also wondering when the market’s interest rates will fall. “But we do hear a chorus of Fed speakers, especially last week, in a very notable way, saying that they are restrictive and that they can wait and see what happens with the policy filtering through to the economy,” said Mr. Bernanke.According to the National Association of Realtors, sales of previously owned homes fell to their lowest level since October 2010.
However, there are significant distinctions between today’s market and the foreclosure crisis era. Today, foreclosures are extremely rare, and most current homeowners have historically high home equity. Because so many people refinanced to record-low interest rates between 2020 and 2022, present homeowners enjoy exceptionally low housing costs.
As a result, potential purchasers are also stalled. “I think people are nervous, and there’s a lot of buyer mentality that says, ‘We’ll wait and see.'” “A lot of people just want to sit back and see what happens,” said Lisa Resch, a Compass real estate agent in Washington, D.C. The NAR has reduced its 2023 sales projection to a reduction of up to 20%, down from a previous forecast of a 13% drop.
What will happen to home prices next?
Prices, on the other hand, are a different matter. “Prices appear to be flat from this point forward at an 8% rate, despite the housing shortage,” said Lawrence Yun, NAR’s chief economist. However, Yun believes that metropolitan areas with greater job development and lower pricing will see an increase in sales. He cites Tampa, Jacksonville, and Orlando in Florida, as well as Houston, Texas, and Memphis, Tennessee.
Buyers nowadays will most likely get the best bargains from homebuilders, particularly large production builders like Lennar and D.R. Horton. Builders are assisting with affordability by lowering interest rates for their consumers. This is something they haven’t done before, at least not on this scale.
“Although our mortgage company has been offering slightly below market rate loans most of this cycle (just to be competitive), the full point buydown for the 30-year life of the loan we’ve been referring to recently as a builder incentive is not something we had done in previous cycles, at least not on the broad, majority basis we are doing so today,” said a spokesperson for D.R.Horton. “You could have found it.”
What about the housing shortage?
Single-family house construction is progressively increasing, but it is still far from satisfying demand. Builder mood is deteriorating more as interest rates rise, although the new house industry remains more active than the existing home market. On the plus side, apartment rents are finally cooling off as a record quantity of new supply enters the market. This reduces the motivation for renters to buy. However, rental demand is increasing.
“It appears slowing inflation and a still-strong job market are boosting consumer confidence and, in turn, spurring household formation among young adults most likely to rent apartments,” Jay Parsons, chief economist at RealPage.com, said. Those who still wish to upgrade to a larger home or move to a smaller one face a conundrum.
Prices continue to rise as a result of the supply and demand imbalance, but sellers are becoming more flexible. So a buyer might buy now at higher rates and hope for a price reduction later, or they could wait till rates fall. When they do, however, there will almost certainly be a torrent of demand, leading in bidding wars.
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