Housing Market Volatility Scarces Buyers and Sellers Alike
The current housing market is facing numerous challenges, including high mortgage rates, soaring prices, limited supply, and unusual pent-up demand. These factors are contributing to a decrease in buyer and seller activity. Prices were already on the rise due to increased demand during the peak of the Covid-19 pandemic. However, the situation has worsened with the popular 30-year fixed mortgage rate reaching a record high of 8%. Consequently, mortgage demand has plunged to its lowest point in nearly three decades.
Matthew Graham, the Chief Operating Officer at Mortgage News Daily, expressed his concerns about the situation, describing it as “painful” and “ugly”. He made these comments during an interview on CNBC’s “The Exchange”.
The Federal Reserve attempted to stimulate the economy during the first two years of the pandemic reducing its benchmark rate to zero and injecting funds into mortgage-backed securities. This resulted in historically low mortgage rates, sparking a buying frenzy. The trend was further amplified a sudden shift towards remote work and individuals leaving urban areas. Tumultuously, home prices surged 40% compared to pre-pandemic levels.
However, the situation worsened as inflation rates soared, prompting the Fed to increase interest rates. Ironically, this made the housing market even more expensive. Typically, when rates rise, home prices decrease. Yet, this particular market differs from historical trends due to a severe lack of supply. Homebuilders were severely impacted the Great Recession and subsequent foreclosure crisis, leading to a decade-long period of reduced construction. As a result, the supply-demand imbalance persists, driving prices higher.
Potential sellers find themselves in a precarious position. They are reluctant to trade their current 3% mortgage rates for new purchases with rates as high as 8%. Matthew Graham acknowledges that the volume and activity in the current market surpass those witnessed during the great financial crisis. However, there is uncertainty regarding when the market will see a decline in rates. He notes that several Federal Reserve officials have emphasized their intent to maintain restrictive policies until the impact on the economy becomes clearer.
The National Association of Realtors reported that sales of previously owned homes in September 2022 dropped to the slowest pace recorded since October 2010. Nonetheless, this market differs significantly from the foreclosure crisis era, as foreclosures remain unusually low, and homeowners continue to possess historically high home equity. Furthermore, many homeowners took advantage of record-low interest rates between 2020 and 2022, resulting in affordable housing costs.
Consequently, potential buyers are also experiencing difficulties. Lisa Resch, a real estate agent with Compass in Washington, D.C., explains that many buyers are adopting a “wait and see” mentality, contributing to further stagnation in the market. The NAR has revised its 2023 sales forecast, indicating a potential decline of up to 20% compared to the previously projected 13% drop.
According to Lawrence Yun, the Chief Economist for the NAR, prices are projected to remain relatively stable, despite the housing shortage. He suggests that metropolitan areas with robust job growth and affordable prices, such as Tampa, Jacksonville, Orlando, Houston, and Memphis, will experience an increase in sales. Homebuilders, particularly large production builders like Lennar and D.R. Horton, are expected to offer the most favorable deals to buyers. These builders are assisting with affordability reducing interest rates for customers, a practice that was not as widespread in previous cycles.
In terms of the housing supply issue, construction of single-family homes is gradually increasing but is still insufficient to meet demand. Builder sentiment is declining due to higher rates, although the new home market remains more active than the market for existing homes. On a positive note, apartment rents are stabilizing as a record amount of new supply enters the market. This has reduced the incentive for renters to transition to homeownership. However, rental demand continues to rise.
For those seeking to upgrade to larger homes or downsize to smaller ones, they find themselves in a dilemma. While prices continue to rise due to the supply-demand imbalance, sellers are becoming more flexible. Buyers can choose to purchase now at higher rates and hope for a reduction in price, or they can wait for rates to drop. However, it is anticipated that when rates eventually decrease, there will be a surge in demand, leading to intense bidding wars.