The US real estate market has rarely experienced such turmoil…

This is exactly what Federal Reserve officials are hoping to see more and more of as they raise interest rates to bring down inflation, the highest in forty years. Part of their effort is a slowdown in the housing market, where low borrowing costs introduced to protect the economy from the COVID-19 pandemic have fueled house prices by 35% over the past two years. While house prices are not part of the inflation indexes tracked by the Fed, they do affect other factors, such as rents, that affect inflation.

Rising rates mean that borrowing to buy a house suddenly becomes more expensive. Yields on 10-year Treasury bills, which serve as a benchmark for mortgage rates, rose on expectations of a quick rate hike by the Fed. According to the Mortgage Bankers Association, the average rate on 30-year mortgages is now 5.37%, more than 2 percentage points higher than at the beginning of the year. So buyers of a typical existing home sold in March for $375,000 will pay $440 more per month than they did in December if they make a 20% down payment and borrow the balance at a fixed rate for a period of 30 years. years.

Rising interest rates account for much of this increase. At the same time, inflation is also pushing up food and gasoline prices. “The housing market is definitely out of whack,” said Fed chief Christopher Waller, who last month revealed how he sold his St. Louis home to a cash-only buyer without an inspection. “We will see how interest rates start to cool things down in the future.”

“New Home Buyers Face Soaring Costs”: Average Monthly Home Cost at Average U.S. Mortgage Rate. The increase in costs is due to the increase in the cost of credit, and not to the increase in the cost of housing.

inflection point

The last time mortgage rates rose this fast was in the spring of 1994. Total home sales fell 20% when the Fed raised rates and home price growth slowed. Economists expect sales to slow this time around and prices to slow down again, perhaps to an annual rate of around 5% by the end of the year.

But an unprecedented set of factors, including record low housing stocks, exceptionally high household savings, a very tight labor market, and increased worker mobility, are creating counterflows that could throw those projections off course. Existing home sales in March were the weakest in nearly two years, according to the National Association of Realtors. Mortgage applications also fell.

Drops in listing prices like the one the Grualls saw are more widespread, accounting for 13% of homes listed for sale in the four weeks from mid-March to mid-April, according to real estate agency Redfin, up from 9% a year earlier.

At the same time, mortgage applications remain above pre-crisis levels and home prices are at record highs, with homes typically sold out within 17 days of going on sale. Part of this rise may be the result of last-minute buyers, especially those with pre-approved financing, rushing to buy homes before rates rise even higher.

“Things will escalate over the next two months until we hit a tipping point,” Nicole Bashot, a Zillow economist, said likely this summer.

Rising Mortgage Value: Change in 4-month mortgage rates in percentage points. These rates have not risen this fast since the 1990s.

Is it different this time?

The correlation between rising house prices and mortgage rates, while still strong, has declined over the past 20 years, says MIT professor and researcher Ann Thompson, who recently co-authored a paper with Yale University’s Robert Schiller that says: price jump does not appear. reflect bubble. “I wouldn’t even call it a cold snap, more like a flattening of growth, but not this year because interest rates are still relatively low,” Ms Thompson said, noting that mortgage rates have historically been much higher.

Many regional markets remain very hot, especially in the South, thanks to increased shoppers’ flexibility in terms of where they work and soaring wages in the face of labor shortages. These factors may also support home sales, although higher rates are holding prices back somewhat.

Rob Labow, 35, and her husband worked remotely from their two-bedroom rental apartment in Austin, Texas, until late last year, when Labow’s company began calling employees back to the office. In January, Lubow began looking for a new job that would allow her to work from home permanently. A month later, he had one – and a 35 percent allowance.

Austin home prices were well over the $300,000 limit. According to the Austin Board of Realtors, the median home price in March was $624,000, up from $415,000 two years earlier. Because their remote work means mobility, they bought a three-bedroom house in Kingston, New York, just under budget last month. The average home price is $280,000, according to Redfin, up nearly 20% from last year.

“If people respond to rising housing costs by moving to more affordable places, it could lead to more home sales,” said Daryl Fairweather, chief economist at Redfin.

The number of homes for sale has fallen to almost an all-time low. (grey areas are periods of recession)

This is madness!

Record low inventories over the past two years also mean there is strong pent-up demand, especially among home-ready millennials whose share of purchases has increased. But that demand is hitting back at baby boomers, who are being discouraged from downsizing by rising alternative housing costs, which remain in place and prevent the big homes desired by young people from coming on the market at a time when too few new homes are being built.

Meanwhile, Realtors Group data shows that the share of cash sales in March was the highest in almost eight years, a sign that the supply is being swallowed up by institutional investors or existing homebuyers.

Mike Wang, 33, works for a vitamin manufacturer and rents an apartment in Los Angeles. He has had several promotions and is now earning 50% more than he did three years ago. “Even making more money than I could have hoped for when I was in my early twenties, house prices topped that figure, which when I think about it reminds me of a sacred cow, it’s crazy.” Wang says he has no choice but to wait in the hope that prices come down as expected and he can catch up enough to buy a house in a few years.

With so many people his age looking to buy houses and so few houses being built, he’s not sure that’s the case. “While surprised in the past, I wouldn’t be surprised if things go against analysts’ forecasts,” Wang said.

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