Today’s housing market is a toxic mixture of high mortgage rates, high prices, tight supply and strangely strong pent-up demand — and it’s scaring off buyers and sellers alike.
Prices were already high, driven by supercharged demand through the height of the Covid-19 pandemic. Now the favored 30-year fixed mortgage rate is at 8%, the very best in many years, making things even tougher. Mortgage demand is at its lowest point in nearly 30 years.
“I feel it’s painful. I feel it’s ugly,” Matthew Graham, chief operating officer at Mortgage News Each day, said on CNBC’s “The Exchange” on Thursday.
In the course of the first two years of the Covid-19 pandemic, the Federal Reserve dropped its benchmark rate to zero and poured money into mortgage-backed securities. The result was record-low mortgage rates for 2 solid years. That drove a buying frenzy, which was also fueled by a sudden urban exodus and the brand new work-from-home culture. Home prices jumped 40% higher from pre-pandemic levels.
Then, as inflation surged, the Fed hiked rates. That, sarcastically, made the housing market even dearer. Often when rates go up, home prices go down.
But this market is unlike historical ones since it also has a severe lack of supply. The Great Recession of 2008 and the following foreclosure crisis hit homebuilders especially hard, causing them to underbuild for over a decade. They’ve still not made up the difference.
Who’s hurt by the present housing market?
Would-be sellers, meanwhile, are trapped. They’ve little desire to trade the three% rate they currently have for an 8% mortgage rate on a recent purchase.
“I do not think anybody in my community of mortgage originators would disagree that in some ways, that is worse than the nice financial crisis by way of volume and activity,” MND’s Graham said.
He’s also unsure when the market will see a decline in rates. “But we do hear a chorus of Fed speakers, especially last week, in a really notable way, saying that they’re restrictive and that they’ll wait and see what happens with the policy filtering through to the economy,” he said.
So, that leaves potential buyers stuck, too.
“I feel persons are anxious, and there is numerous buyer mentality of, ‘We will wait and see.’ So numerous people just want to sit down tight and see what happens,” said Lisa Resch, an actual estate agent with Compass in Washington, D.C.
The NAR is now lowering its 2023 sales forecast to a decline of as much as 20%, from a previous forecast of a 13% drop.
What’s next for housing prices?
Prices are a distinct story.
“Prices look to be flat from this point onwards at an 8% rate, despite the housing shortage,” added Lawrence Yun, chief economist for the NAR.
Yun noted that metropolitan markets with faster job growth and comparatively reasonably priced prices, nevertheless, will see an upswing in sales. He points to Florida markets similar to Tampa, Jacksonville and Orlando, in addition to Houston, Texas, and Memphis, Tennessee.
Buyers today will likely get the most effective deals from homebuilders, especially the massive production builders similar to Lennar and D.R. Horton. The builders are helping with affordability by buying down rates of interest for his or her customers. That is something they’ve not typically done up to now — no less than not at this scale.
“Although our mortgage company has been offering barely below market rate loans most of this cycle (simply to be competitive), the complete point buydown for the 30-year lifetime of the loan we have been referring to recently as a builder incentive isn’t something we had done in previous cycles, no less than not on the broad, majority basis we’re doing so today,” said a spokesperson from D.R. Horton. “You may have found it on select homes up to now on a particularly limited basis.”
What in regards to the housing supply problem?
Construction of single-family homes is rising slowly, nevertheless it continues to be nowhere near meeting demand. Builder sentiment is dropping further into negative territory, resulting from higher rates, but the brand new home market continues to be more lively than the marketplace for existing homes.
On the intense side of housing, apartment rents are finally cooling off, due to a record amount of recent supply hitting the market. This provides renters less incentive to leap into buying. Demand for rentals, nevertheless, is rising.
“It appears slowing inflation and a still-strong job market are boosting consumer confidence and, in turn, spurring household formation amongst young adults most certainly to rent apartments,” said Jay Parsons, chief economist at RealPage.
For those still wanting to upgrade to a much bigger home or downsize to a smaller one, they’re caught in a conundrum.
Prices are still rising resulting from the availability and demand imbalance, but sellers are being more flexible. So a buyer could purchase now at the upper rates and hope to get a break on the worth, or they’ll wait until rates drop.
But after they do, there may be likely going to be a flood of demand, leading to bidding wars.
