- The housing market remains surprisingly tight, even with mortgage rates at their highest level in 20 years.
- Demand is high and supply is low as current owners are reluctant to let go of the low interest rates they locked in a few years ago.
- “There is a complicated market where there is not much demand and people are not willing to sell aggressively, but prices are still going up,” said a person familiar with the matter.
What the hell is going on in the housing market?
Even as mortgage rates near their 20-year peak, prices remain high and supply and demand are out of balance, sending conflicting signals about what’s next. It is
Conventional wisdom holds that when interest rates rise, prices fall. But that hasn’t happened, even after 10 rate hikes by the Federal Reserve that have had the effect of raising interest rates on all kinds of loan products, including mortgages.
If there’s one thing experts can agree on about housing, it’s that the market remains surprisingly tight.
That explanation boils down to a unique set of circumstances unfolding in a warped post-COVID-19 world. A wave of people were trapped in ultra-low mortgages, creating a shortage of inventory. Higher mortgage rates have hurt demand, but have helped keep prices down.
“The housing market is weird right now,” LendingTree senior economist Jacob Channel told Insider. “Compared to the situation during the pandemic, prices will probably remain high relative to recent history for some time.”
Current Homeowners Are Locked Up
Rising interest rates are not only deterring new buyers, they are also scaring sellers from putting their homes on the market. Even if the seller manages to sell at a high price, they still have to navigate a tough market to find a new home. For many people, leaving a mortgage under 3% and a mortgage at around 7% is not a start, even if they make a lot of money on the sale.
This population makes up a significant portion of homeowners. Nearly a quarter are sitting at mortgage rates below 3%, near all-time highs.
“A 3% difference in mortgages is huge,” Mr Channel said. “You would have to buy a house worth tens of thousands of dollars less to pay the same monthly fee. There’s a complicated market, there’s not a lot of demand, people aren’t willing to sell, but the price is still rising.” ”
Declining demand usually increases supply, making housing more affordable. But that’s not what happened last year. The average seller can still amass about three offers for a listed home, according to NAR data.
Nadia Evangelou, senior economist at the National Association of Realtors, admits there are still more buyers than available homes. Middle-income housing, which should account for the largest share of the market, has been hit particularly hard this year, she explained. All are back in stock.
“A person with an income of about $75,000 should be able to buy about half of all listings, but currently can only buy about 23% of listings,” Evangelow said. “Homebuyers are facing a double whammy of high interest rates and a shortage of supply, especially for those looking for affordable housing, which means prices will have to rise.”
Surprising increase in new home sales
Perhaps the most surprising development in the housing market has come in the form of the recent increase in new home sales and housing starts. Both are encouraging signs that homebuying activity is picking up.
Sales of new homes in May were up 20% year-on-year, while sales of existing homes were down. For new homes, builders may offer buyers a buyout price that reduces overall mortgage rates, said Ari Wolfe, chief economist at real estate firm Zonda.
Housing starts have shown resilience, overcoming longstanding post-pandemic supply chain challenges and accelerating construction. This is very important as it can help reduce inventory shortages and thus balance affordability for buyers. In theory, house prices should fall, or at least stabilize, as inventories replenish.
“I think there’s been a huge discussion about the lock-in effect on the housing market and how homeowners are reluctant to get out of low interest rates,” Wolff said. But she wants to move, and if she can get a builder to buy it at a lower price, suddenly that “no hurdle,” she says.
Chanel said there is no magic number for how much interest rates must drop to bring demand back to previous levels. Mortgage rates have historically not been that high, but the market is skewed in terms of supply and demand.
Demand could rebound sharply if mortgage rates fell to around 5%, but a flood of buyers into the market could spur even higher home prices, Channel said. Stated. Lower interest rates could also free up more inventory as homeowners move away from side jobs.
“On the one hand, increased demand will put upward pressure on house prices,” he said. “However, the supply of housing has fallen significantly, partly because of higher construction costs and difficult access to materials. But now supply chains are improving and raw material prices are falling. So there are two possible drivers: Demand could pick up.” Interest rates could fall and supply could improve as buildings come back. “
Evangelow expects mortgage rates to stay above 6% through the end of the year and drop to about 5.6% in 2024. She expects house prices to rebound next year after a brief cooling as interest rates fall.
“The market needs more housing,” she says. Evangelow expects the supply shortage to continue into next year, as the shortage of inventory encourages competition among homebuyers.
There is no immediate solution to the inventory problem, as the housing shortage will take years to resolve and there will be no house price crash like the 2008 one.
“People should just sit back and hope the market remains tough on affordability,” Channel said.
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