If you were trying to buy or sell a house over the last two years, you know firsthand how turbulent the housing market has been. Sellers were regularly getting more than asking price, often much more. Buyers were putting in bid after bid to no avail. Inspections were waived, all-cash offers were popular, and there was a general sense of mayhem pervading the entire housing market. Cue the tire screech sound effect, because the housing market is definitely cooling off, on the heels of an increased interest rate and looming inflation.
Magnified Mortgage Rates
One of the most prominent reasons for the housing market’s recent cold shower is the speedy increase in interest rates. According to the New York Times, “Since December, mortgage rates have nearly doubled — rising to around 6 percent, the highest they’ve been since 2008 — in response to moves by the Federal Reserve to control inflation. In January, a buyer would have paid around $2,100 a month in principal and interest for a $500,000 home loan. Today, that same loan would cost about $2,900 a month.”
“When inflation peaks, mortgage rates will have peaked, and that’s really the key ingredient,” said Greg McBride, the chief financial analyst at Bankrate.com. “If we get more inflation numbers like we did a couple of weeks ago, there is no telling how high mortgage rates could go.”
The Washington Post reports that when inflation started to spike, the Federal Reserve tried to counterbalance that, increasing its benchmark interest rates 3 times in 2022, with four more increases on the way. The most recent hike in June was three-quarters of a percentage point, the largest since 1994.
With burgeoning interest rates come higher borrowing costs. The average rate for a 30-year fixed rate mortgage is now at 5.3 percent, according to Freddie Mac, up from 2.9 percent a year ago. According to Zillow, home prices have risen more than 20 percent from May 2021 to May 2022. And because the price of everything else is rising, and the stock market is getting battered, this is really squeezing consumers who are trying to buy a house.
The good news is that experts are not predicting the kind of elevated rates of the 1970s and 1980s, which topped out at 18.4 percent in 1981. But honestly, the experts are just as surprised as anyone about the rapid increase, and no one has a crystal ball about what happens next. “I don’t think anybody on the planet expected them to double in six months,” said Jonathan J. Miller, the president of Miller Samuel Real Estate Appraisers & Consultants. “That’s thrown a monkey wrench, another calculation, into the mix.”
“We all had rose-colored glasses when the vaccine was rolling out and it seemed like everything was going to get better,” said Daryl Fairweather, the chief economist at Redfin. “It turns out it’s a bit of a rougher ride reopening the economy and getting things back to normal.”
And if you think that renting a home will keep you out of the fray of high mortgage rates and spiking costs of home ownership, think again. According to the New York Times, “Pick nearly any city across the country — Austin, Nashville, Seattle, New York — and the story is one of rents rising by double-digit percentages amid scant inventory.”
With a vacancy rate below five percent, more than a dozen renters end up competing for the same vacant apartment, raising the rates and increasing renting difficulty. And with housing rates skyrocketing, once renters get in, they are not leaving. The rental roller coaster began in spring 2020, when cities like New York saw rents plunge as people vacated. Other cities like Miami enjoyed stability, as people realized they could work from home and went to live somewhere else.
“Everyone wanted more space, and a lot of people wanted their own space,” said Igor Popov, the chief economist for Apartment List. “Those renters all gobbled up the inventory at a time when it was really hard to build and to buy. It was this perfect storm of raging demand and tight inventory.”
Many renters will remain where they are, since buying a home is such an unpredictable proposition at the moment.
Long Term Plans
Because the home inventory is still so low nationwide, and many people still want to buy homes, the market may be dicey but experts say it is unlikely to collapse. But it is definitely cooling off.
Ali Wolf, chief economist at Zonda,“Prospective home buyers have gotten to the place that they are either intentionally stepping out of the housing market as they wait and see what happens next or are forced out of the housing market given the higher costs of homeownership.”
And according to Redfin data, some places across the country have a lot of home inventory. “It is up 47 percent in Denver, 43 percent in Oakland, Calif., and 10 percent in San Jose. Some markets that transformed during the pandemic have also pumped the brakes,” says Eric Finnigan, director at John Burns Real Estate Consulting.
And although it seems like the balance is teetering, it is still a seller’s market. “In May, the median price of a home in the United States passed $400,000 for the first time, according to the National Association of Realtors. And bidding wars accounted for 55 percent of home sales in the four week period ending June 19, up from 53 a year earlier, according to Redfin.”
“You have to be a little bit of a cowgirl,” said Bess Freedman, the chief executive of Brown Harris Stevens, which predicted in its second quarter market report that Manhattan was shifting to a buyer’s market. While one buyer may be scared off by the volatility, another “may come in and say, ‘You know what, there’s a hell of an opportunity right now. I have the money, I’m going to go in, I’m going to negotiate, I’m going to get a great price.’”
The cooling market could return to the pre-pandemic normal, with homes selling over a few months, and appraisals and inspections back in the mix. “If you can wait, keep waiting until the weirdness that’s happening in the economy goes away,” Fairweather said. “The long-term outlook is rosier than the short-term outlook.”
The analysts themselves realize that they can’t predict everything, and whether the cooling market will lead to an Arctic freeze, or selling houses will heat up again soon. Buckle your seatbelts because the ride is certainly not over yet.