High Mortgage Rates and High Prices: Why the Housing Market is Slowing

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After mortgage rates hit record highs during the pandemic, driving up demand for new homes and pushing up listing prices, the housing market is now slowing.

This is good news for buyers who can afford to stay in the market. But many potential buyers are priced out, as high mortgage rates and high prices make buying a new home unaffordable for some. At the same time, construction of new homes declined as builders became more wary of falling demand – and rental prices continued to rise.

“Buyers really have bargaining power for the first time in several years,” said Nicole Bachaud, senior economist at Zillow. “But that’s with the caveat, only if you can afford the house prices right now.”

Here are seven charts that help explain what’s going on with the housing market.

The average 30-year fixed mortgage rate hit 5.66% on Sept. 1, according to data from Freddie Mac. The rate has fluctuated in recent weeks, although it has fallen slightly from its peak of 5.81% in June, which was the highest level since 2008.

Mortgage rates have skyrocketed during the pandemic due to fears over the coronavirus and its impact on the US economy (in January 2021, the 30-year fixed mortgage rate hit 2.65%). This has led to an increase in demand for homes as lower mortgage rates make the cost of buying a home much cheaper as people have to pay less interest each month.

Mortgage rates rose rapidly earlier this year, in part because the Federal Reserve began raising interest rates to deal with high inflation. Although the Fed does not set mortgage rates directly, higher interest rates generally make borrowing more expensive across the economy. Fed policy is also one of the factors that can influence the 10-year Treasury yield, which fixed mortgage rates tend to follow. As mortgage rates rose, more buyers were forced out of the housing market, which cooled demand and increased the supply of available homes.

Sales of new single-family homes and existing homes fell, signaling a drop in demand as high mortgage rates and home prices push potential buyers out of the market. Sales of new single-family homes in July were at a seasonally adjusted annual rate of 511,000 units, down 12.6% from June, according to Census Bureau data. This marks a nearly seven-year low.

The length of time ads stayed in the market also increased as competition cooled. The share of U.S. homes listed for 30 or more days without going through a contract rose 12.5% ​​in July from a year earlier, according to data from Redfin.

Home prices soared as more Americans tried to take advantage of lower mortgage rates at the start of the pandemic. The combination of lower mortgage rates and an already insufficient supply of homes has led to bidding wars as potential buyers bid above the listing price to get ahead of their competitors.

Although prices are starting to fall now, they are still much higher than they were a year ago. The median price for existing homes was $403,800 in July, according to data from the National Association of Realtors. That’s down $10,000 from June, but still 10.8% higher than a year ago.

Some areas have seen home prices fall faster, especially in cities that have seen higher demand for homes during the pandemic. For example, 70% of homes for sale in Boise, Idaho, fell in price in July, according to a Redfin analysis. Other cities like Denver, Colorado saw home prices drop 58% in July.

Construction of new homes slowed as builders grew increasingly concerned about a drop in demand due to rising mortgage rates. Housing starts, or the start of construction on new residential housing, fell to 1.45 million in July, according to Census Bureau data. That was a 9.6% drop from the previous month.

Builder confidence also fell in August for the eighth consecutive month as builders struggled to cope with falling demand for homes and rising construction costs due to ongoing supply chain issues. , according to a survey by the National Association of Home Builders.

“The total volume of single-family housing starts will show a decline in 2022, the first such decline since 2011,” Robert Dietz, the association’s chief economist, said in a statement.

After rising steadily earlier this year, new registrations fell to 670,766 in July, according to data from Redfin. That’s a drop of 132,649 new listings from the previous month.

The data indicates potential sellers are staying put as home price growth slows, said Daryl Fairweather, chief economist at Redfin. The job market is also strong and homeowners are sitting on record net worth, Fairweather said, meaning they don’t feel pressured to list their homes.

“They’ve been able to lock in very low mortgage rates, so they don’t really have a reason to sell,” Fairweather said. “If we went into a recession and unemployment increased and homeowners could no longer pay their mortgages, that would cause prices to fall much faster than what we are seeing now. But I think that is unlikely to happen.

Even though new listings are falling, the total inventory of homes for sale has increased as supply improves. The number of active listings for sale rose 5.1% in July from the previous month, marking the fifth straight month of rising inventory, according to data from Zillow. Nonetheless, a more substantial increase in supply has been hampered by a lack of new listings and a slowdown in new construction.

Rent prices have also surged during the pandemic, although the pace of growth has started to moderate. Typical monthly rent was $2,031 nationwide in July, up 0.6% from June and 13.7% from a year ago, according to data from Zillow.

Rent usually increases over time and rarely sees price drops, so rent will likely only get more expensive. And as more potential buyers are priced out due to higher mortgage rates and more expensive listings, that will likely keep demand high in the rental market, said Yelena Maleyev, an economist at KPMG.

“What are people to do if they can’t buy a house because so many more people are now overpriced with higher house prices and rising interest rates? They must remain tenants,” Maleyev said.

Housing affordability across the country has fallen as mortgage rates have risen, according to the National Association of Realtors’ Housing Affordability Index, which measures whether an average family earns enough income to qualify for a mortgage on a typical home. Affordability fell in June, with the monthly mortgage payment up 53.7% and median family income up 5.8% from a year ago.

Although affordability is down and various metrics seem concerning, a drastic downturn in the housing market is still unlikely, said Bachaud, the Zillow economist. Bachaud said the market was instead going through a “strange transition period” to rebalance supply and demand after buyers struggled to find enough options earlier in the pandemic.

“What’s happening in the housing market right now looks really scary compared to what we’ve been,” Bachaud said. “But it’s important to remember that this is all meant to rebalance to get us back into a normal market.”

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