Housing market continues to show signs of slowing down as interest rates keep rising

WASHINGTON (TND) — The housing market is continuing to show signs of slowing down after operating at a blistering pace throughout the coronavirus pandemic as more people sought out space and took advantage of low-interest rates.

Federal Reserve Chair Jerome Powell has made taming inflation a top priority for the U.S. central bank, leading to multiple rate hikes as policymakers try to cool off a demand that has outstripped supply and contributed to near record-high inflation.

Average interest rates for a 30-year mortgage were 5.81% for the week ending June 23, according to Freddie Mac data. Interest rates for 30-year mortgages were under 3% as recently as December.

The difference can mean hundreds of dollars extra for a monthly mortgage payment, making it too expensive for some people to afford in addition to dealing with inflation in other areas like food and gas.

Existing housing sales have fallen for three consecutive months, according to the National Association of Realtors. Sales dropped 3.4% from April and are down 8.6% from last year.

"Home sales have essentially returned to the levels seen in 2019 – prior to the pandemic – after two years of gangbuster performance," said NAR chief economist Lawrence Yun.

So far, the drop in demand has not led to a decrease in prices. The median sales price for an existing home was $407,600 in May, the first time it has been over $400,000 and an increase of nearly 15% from a year ago, according to NAR.

Taking some buyers out of the market may help prices stabilize moving forward as fewer bids come for homes on the market. It is a stark contrast from the last two years, where houses sold for essentially any list price with multiple competing offers.

Further sales declines should be expected in the upcoming months given housing affordability challenges from the sharp rise in mortgage rates this year," Yun said. "Nonetheless, homes priced appropriately are selling quickly and inventory levels still need to rise substantially – almost doubling – to cool home price appreciation and provide more options for home buyers."

Different segments of the market will be hit differently by rising interest rates based on what supply is available. The U.S. has struggled to maintain enough supply of homes, particularly at the entry level, for years.

Going forward different segments of the market will be impacted differently. Demand for entry level homes will likely remain strong as a lack of existing and new inventory is confronted with a potentially increasing pool of buyers,” said Jonathan Everett, assistant professor of practice for Virginia Tech’s Blackwood Program in Real Estate. “Therefore, I do not anticipate prices for entry level homes to decline anytime soon. However, I think we will see some stalling or slight reduction in prices among upper medium to higher priced homes as buyers are priced out due to rising interest rates.”

Building up the nation’s housing supply is one of the biggest factors in getting more affordable homes for purchase or rent. Increased interest rates also impact developers and builders, who have long struggled to keep up with demand.

As it gets more expensive for a builder to start and finish a project, some could pull back on their plans.

“As borrowing costs for homebuilders rise, expenses rise, requiring higher sales prices to maintain profit margins,” Everett said. “Simultaneously, as interest rates rise, borrower purchasing power erodes. Combine this with already rising material and labor costs, and homebuilders have to carefully evaluate the price range in which they can build and achieve a reasonable profit.

“This is all the more reason why I think building entry level homes is becoming increasingly more difficult.”

Those difficulties have started to be reflected in sentiment from home builders. The National Association of Home Builders index has fallen for six straight months, which shows a decline in confidence in the market. In June, the index was at 67 out of 100 — lower than it has been since the housing boom but still in line with historical averages.

It is nearly impossible to predict what the long-term future will look like for the housing market. Uncertainties about the economy, the war in Ukraine’s impact on inflation, how the supply chain responds to a pandemic recovery and a host of other issues make it difficult to estimate the long-term future.

“I do think the general consensus appears to be that demand is still greater than supply. In particular, I think the shortage of entry level housing should keep this specific market segment strong,” Everett said. “However, I do think we are bumping up against a resistance level for non-entry level homes and affordability at today’s prices may prove to be a growing concern.”