High costs, low inventory indicate the market could be in for a cooldown this fall.
These are tough times for the housing market. A lack of inventory and high mortgage rates have combined to rob homeowners of the incentive to sell their houses at near-record prices while would-be buyers are scared off by sticker shock and the prospect of paying off the loan.
– On Thursday, Freddie Mac’s weekly mortgage report found that even though rates on a 30-year loan ticked down a notch to 7.12%, it was still the fourth consecutive week of 7% or higher rates. Meanwhile on Wednesday, the Mortgage Bankers Association said mortgage applications have plunged 28% since last year and are now at the lowest level since late 1996.
– The National Association of Home Builders said last month that its August survey of builder sentiment had fallen 6 points to 50 out of 100 following seven months of rising confidence levels. The index measuring traffic of prospective buyers also fell 6 points to 34.
– Existing home sales in July fell 2.2% to an annual level of 4.07 million. A year ago, sales were running at a 4.88 million clip. Although pending sales rose slightly in the same month, they are still off 14% from 2022.
Housing enjoyed a record spell as the nation dealt with the coronavirus pandemic. Remote work policies and massive stimulus from Washington, coupled with extremely low mortgage rates, encouraged many people to move and buy homes. That, in turn lifted prices – especially in some of the large coastal cities, allowing homeowners to trade into larger and more affordable homes beyond the traditional commuting ranges.
“Rates should continue to come down from their peaks earlier this summer, but high home prices and growing affordability challenges are taking a toll on more prospective home buyers,” said Lisa Sturtevant, chief economist at Bright MLS. “At the same time, the balance between renting and owning in many markets has shifted toward renting as more new apartment construction comes online.”
Sturtevant added that something else may be at work in the current market.
“There is also the fatigue factor. After two years of a pandemic-fueled housing market frenzy and another year of rising rates and tight inventory, consumers are weary. Even if rates dip down to below 7% in the coming weeks, that is not going to stave off a market cooldown this fall.”
Another indicator of concern for the housing sector is the drop in applications to refinance a mortgage. During the pandemic, as the Federal Reserve moved to lower interest rates, mortgage rates fell to 3% and below, prompting a wave of refinancings.
But last week, refinancing applications fell 5% and are now 30% lower than a year ago. A large majority of homeowners currently have mortgages that have rates below 4%.
“Mortgage applications declined to the lowest level since December 1996, despite a drop in mortgage rates,” said Joel Kan, deputy chief economist at the Mortgage Bankers Association. “Both purchase and refinance applications fell, with the purchase index hitting a 28-year low, as prospective buyers remain on the sidelines due to low housing inventory and elevated mortgage rates.”
Prices have yet to fall in any material way. According to data from real estate firm Redfin, the median price of a home was up 4.5% as of Sept. 3, to $378,725. The median mortgage payment is $2,612, up 15% from a year ago.
Redfin’s data shows that the total number of homes on the market is down 18% from a year ago, the biggest decline since February 2022 and one of the major factors driving prices higher.
“The market is marching on, especially for turnkey homes,” Chicago Redfin agent Niko Voutsinas said on the firm’s website. “If folks can figure out a way to buy instead of rent, they will. Some buyers are cutting back on other expenses to up their housing budgets because they believe home prices are only going to increase. They’re nervous that the minute rates come down, a flood of competition will edge them out.”
And therein lies the conundrum. If, as expected, mortgage rates come down when the Fed stops raising interest rates and the economy and inflation cool off, a wave of buyers may materialize. But that is only likely to drive up prices and further curtail the inventory of homes for sale.