Today’s housing market is causing concern for both buyers and sellers. The combination of high mortgage rates, high prices, tight supply, and strong pent-up demand is creating a toxic environment that is scaring off potential participants. The 30-year fixed mortgage rate has reached 8%, the highest in decades, making it even more challenging for buyers to afford homes. In fact, mortgage demand is currently at its lowest point in nearly 30 years.
The housing market experienced a surge in demand during the height of the Covid-19 pandemic, leading to increased prices. The Federal Reserve contributed to this trend by dropping its benchmark rate to zero and investing heavily in mortgage-backed securities. Consequently, record-low mortgage rates attracted buyers, especially those seeking a change due to the urban exodus and the rise of remote work. As a result, home prices soared by 40% compared to pre-pandemic levels.
However, as inflation rates increased, the Fed decided to raise interest rates. Ironically, this decision further inflated the housing market, which typically experiences lower prices when rates rise. Additionally, the market is facing a severe shortage of supply, as homebuilders were heavily impacted by the Great Recession of 2008 and subsequent foreclosure crisis. This underbuilding phenomenon has persisted for over a decade, and there have been no significant efforts to bridge the gap.
Sellers are finding themselves trapped, as they have little motivation to trade their current 3% mortgage rate for an 8% rate on a new purchase. Matthew Graham, chief operating officer at Mortgage News Daily, believes that the current state of the market is worse than the great financial crisis in terms of volume and activity. It is uncertain when the market will see a decline in rates, as the Federal Reserve remains cautious, monitoring the policy’s impact on the economy.
Sales of pre-owned homes in September reached their slowest pace since October 2010, according to the National Association of Realtors. However, this housing market differs from the foreclosure crisis era, as foreclosures are rare, and homeowners now possess historically high home equity. Many homeowners also refinanced their mortgages at record-low interest rates between 2020 and 2022, resulting in affordable housing costs.
Potential buyers find themselves in a difficult position. Many are adopting a wait-and-see approach due to anxiety surrounding the market. Consequently, the NAR has revised its 2023 sales forecast to predict a decline of up to 20%, compared to the previous forecast of a 13% drop.
Despite the shortage of supply, Chief Economist for the NAR, Lawrence Yun, believes that housing prices will remain flat at an 8% rate. Metropolitan areas with faster job growth and relatively affordable prices, such as Tampa, Jacksonville, Orlando, Houston, and Memphis, may experience increased sales. Homebuilders, particularly large production builders like Lennar and D.R. Horton, are providing buyers with favorable deals by offering lower interest rates. This strategy is being implemented on a broader scale than in previous cycles.
The construction of single-family homes is increasing but still inadequate to meet demand. Builder sentiment is decreasing due to higher rates, although new home sales remain more active than existing home sales. On a positive note for renters, apartment rents are cooling off due to a record influx of new supply. This makes renting more attractive, leading to increased demand for rental properties.
Those hoping to upgrade or downsize face a dilemma. While prices continue to rise due to supply and demand imbalances, sellers are becoming more flexible. Buyers can either purchase a home now at higher rates and hope for a price reduction or wait for rates to drop. However, when rates do decline, there is likely to be a surge in demand, potentially resulting in bidding wars.
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