The housing market is stuck in neutral. Why house prices have to fall for things to change
Demand for housing has fallen, but supply is coming back. When will the housing market find its equilibrium?
The number of active real estate listings in October rose 33.5% year-over-year, the highest level since 2020, according to data from Realtor.com. However, actual home sales were down almost everywhere, falling 23.8% year over year, according to the National Association of Realtors (NAR).
High prices and rising mortgage rates are making buying a home out of reach for many buyers, especially first-time buyers. This will be the case until prices or mortgage rates fall and the market returns to equilibrium.
Indeed, that is what the Federal Reserve is trying to do by raising interest rates to bring inflation down. By making it more expensive to borrow money, demand for goods like houses should fall, and prices with it. But for now, things are at a standstill.
“The housing market was very overheated for a few years after the pandemic as demand grew and rates were low,” Fed Chairman Jerome Powell said this week. “The housing market must regain a balance between supply and demand.”
While the Fed’s rate hikes affect all parts of the economy, homebuyers are particularly hard hit.
“In an environment where the Fed is raising rates, as it has done in recent months, mortgages are becoming increasingly unaffordable,” says Shang Saavedra, personal finance blogger at Save My Cents, LLC. “And so, we’re starting to see demand drop, home sales go down, and rents go up.”
The Fed’s efforts to calm inflation usher in a less competitive housing market. After two years of low inventory and strong demand, rising mortgage rates are causing buyers to pause. This drop in demand means the days are numbered for the intense sellers’ market.
What the Fed’s rate hikes mean for the housing market
The Fed’s decision to raise its rate by 75 basis points came after the consumer price index reported inflation at 8.2% year-on-year in September. That’s still well above the Fed’s 2% target.
At Wednesday’s press conference, Powell signaled that the aggressive rate hike regime would continue into 2023, saying it was too early to discuss a pause in increases.
“Borrowers can expect rates to continue to rise for the foreseeable future,” says Vikram Gupta, executive vice president and head of home equity at PNC Bank. “They went up 75 basis points yesterday. They will probably go up 50 basis points in December.
As homebuyers come under pressure from high prices and mortgage rates, something has to give. And based on messages from the Fed, it won’t be mortgage rates.
“Consumers tend to buy by paying, not by price. If I wanted to buy a house now, with mortgages at 7% or 8%, I wouldn’t be able to afford it because prices haven’t come down yet,” says Karl Wagner, partner at Biondo Investment Advisors. “What we need is for the housing market to correct itself.”
When will the housing market balance out?
In short: Finally.
In an environment of rising rates with no end in sight, fewer potential buyers are even able to enter the housing market. So while there are more homes on the market than we’ve seen in recent years, they’ll be around longer.
“Our belief is that the level of house price growth will slow as we head into next year. We actually think house prices will go up a bit in some markets, and that’s in response to falling demand and rising supply,” Ali Wolf, chief economist at Zonda, told us in August. a housing data company.
“We’ve seen housing demand plummet,” says Christine Cooper, chief economist at CoStar, a property analytics provider. “We are going to strike another balance.
The increased supply of homes and lower demand from buyers means that prices will have to come down.
“The reason they haven’t come down faster is that there’s still so much pent-up demand in recent years that they’ve been able to keep prices high,” says Gupta.
Making the right home buying decision for you
Experts advise against trying to time the housing market. Mortgage rates are expected to remain at higher levels until 2023, if not longer.
“You’re going to have to change your mindset. If you plan to buy a house, expect higher interest rates. So maybe now is the time to lock in, even though it looks like interest rates are high right now,” says Shannon Gray, CFP and founder of InvestEdge Planning, a financial planning firm in San Diego. , in California.
Although we are not yet in a buyer’s market, potential buyers have more bargaining power now than they did last summer. With a less competitive marketplace, you won’t have to give up contingencies like inspections or appraisals. You can also ask the seller to redeem your mortgage rate using points.
Higher interest on mortgages and other loans also means higher interest rates for savings accounts and CDs. If today’s housing market is out of reach, now is the time to save for your down payment.
After nearly a decade of low mortgage interest rates, homebuyers are understandably in sticker shock. However, it could very well be that mortgage rates above 5% are the “new normal”.
“In a market where mortgage rates are well above what they were at the start of the year, a common phrase is, ‘Marry the house. Date the rate,” says Wolf. “The price of your home is tied to your purchase. Your rate, however, is not.
If mortgage rates drop, you can refinance at a lower rate.
If you wait for rates to drop before buying a home, you can expect to wait a long time. It is more likely that we will see house prices fall first.
“There is a lag effect when it comes to these changes seeping into the system. Consumer behavior doesn’t change overnight just because rates change,” says Gupta.
In this environment of rising rates, it is difficult to buy a house. However, the Fed’s rate hikes are good news for your savings accounts and certificates of deposit (CDs). With interest rates of 2% or more on many high-yield savings accounts, now is a great time to save for your down payment.