What’s next for the US housing market

While some buyers have moved forward, others have delayed their home search or given up altogether because rising costs have made ownership unaffordable.

But neither recession fears as the larger economy looms, the housing market is showing signs of slowing. Sales of new construction homes are down and construction is slipping. Sales of existing homes are dropped out and are trending below 2019 levels. As mortgage rates remain above 5%, applications have fallen to their lowest level after 22 years.

“Affordability is the biggest issue in the housing market today, and higher rates will make that worse on a monthly basis,” said Skylar Olsen, chief economist at Zillow.

Mortgage rates will stabilize

The big surprise for homebuyers in the first half of the year was how mortgage rates rose so much, so quickly. Interest rates on a 30-year fixed-rate mortgage rose from 3.22 percent in early January to a year-high of 5.81 percent in June, according to Freddie Mac. In recent weeks, average interest rates have settled at around 5.5%.

What will my monthly mortgage payment be?

“Someone buying the same house today that they wanted to buy last year is going to see a 50 percent increase in their monthly payment,” said Lawrence Yoon, chief economist for the National Association of Realtors. “People’s incomes are not going to go up 50% in one year. Homebuyers are frustrated. This year they are in complete disbelief that they don’t have the money to buy at a 6% mortgage rate.”

The cost of financing a home is so high that nearly 15 percent of people who signed a contract to buy a home in June backed out, according to Redfin. This is the highest share of canceled home sales since April 2020, when the market nearly ground to a halt due to the pandemic.

But Yun said that while mortgage rates may rise or fall in the coming months, the biggest jumps have already happened.

“It is possible that we will exceed mortgage rates,” he said.

Yoon noted that mortgage rates may have largely already “priced in” current and expected future rate hikes by the Fed. He expects mortgage rates to settle near 6% by the end of the year and that home sales will normalize as mortgage rates become more stable.

Stocks will increase compared to last year

As the market slows, potential buyers who are still looking for a home will have less competition and more homes to choose from, offering more breathing room than the crazy market of the past two years.

Economists were largely on target with their home price forecasts for the first half of the year – with annual price growth peaking in the spring and slowing as the year went on. But the number of sales at this point in the year is well below expectations, said Jeff Tucker, an economist at Zillow.

“Sales volume took a much bigger hit than prices,” he said. “Buyers have been struggling with these mortgage rate hikes for longer than we thought – this has kept prices high. But some buyers started dropping out.”

Yoon said he expects sales in 2022 to decline about 13 percent from last year.

The result, Tucker said, is that as sales volumes continue to fall, inventories will increase.

Rising home buying demand over the past two years has resulted in a record low inventory of homes for purchase and that has pushed prices up. In June, inventories saw their first annual reversal in three years. The number of homes available for sale at the end of June was up 9.6% from May and 2.4% from a year earlier, according to the NAR.

House prices will grow more slowly

The average price of a home reached a record high from $416,000 in June.

But the rate of price growth has been slowing recently. Median existing home prices rose 13.4% in June from a year earlier, compared to a 23% jump in home prices in June 2021, according to the NAR.

How much house can I afford?

In addition, the prices of new construction housing are actually falling. The median sales price of a new construction home fell to $402,400 in June, from $444,500 in May, according to the U.S. Census Bureau and the Department of Housing and Urban Development.

“This is the biggest crack yet in home price inflation,” said Robert Frick, corporate economist at Navy Federal Credit Union. “If existing home prices follow suit, we may finally see a break in the annual increases that have pushed millions of Americans out of the housing market.”

New construction homes make up approximately 10% of transactions, and existing homes make up the remaining 90%. And prices for most of the market are not falling.

Yoon said he expects home prices to rise 11 percent this year. It’s less than that 16.9% increase year-on-year from 2020 to 2021, but more than he had predicted then beginning of this year.

As higher mortgage rates reduce buyer demand, inventories will rise and sales will fall, which should help prices lower for the rest of this year.

“Homes may stay on the market longer, there will be more properties with price reductions,” Yoon said. “Buyers who do more thorough homework may be able to find a home at a price reduction or get a better price negotiation.”

Accessibility will remain a challenge

Housing affordability is at its worst since 1989, excluding the housing bubble of 2004-2008, write David M. Dworkin and Bill McBride in report to the National Housing Conference.

But during the housing bubble, the lack of affordability was fueled by mortgages offering interest rates as low as 1%, which returned to a level that homeowners could not reliably pay. And in the 1980s, housing was unaffordable because of sky-high interest rates – with 30-year fixed-rate mortgage rates ranging from 9% to over 18%.

Today’s market is different, the researchers write. “Rising housing costs are due to the combined impact of apparent underproduction between 2008 and 2020, failures in the housing supply chain since 2020, and increased demand since 2020.”

Should I rent or buy a home?

And that’s unlikely to change much by the end of the year.

Construction of a new home is at a standstill nor are builders waiting to see how well the current housing supply sells before starting more construction.

Sam Khater, Freddie Mac’s chief economist, said he expects homebuyer demand to continue to cool to a more normal pace of activity — but the ability for many people to buy a home will remain difficult.

“The Federal Reserve’s action to help manage inflation has created significant volatility in mortgage rates and, more generally, the housing market,” Hatter said. “Although home appreciation will grow at a more moderate pace, home prices remain high relative to buyers’ incomes. Taken together, these factors are exacerbating affordability challenges and causing a slowdown in the housing market.”

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