Home buyers have lost about $107,000 in buying power since the beginning of the year—and that’s what’s truly scary.

Despite a slight decrease this week in mortgage rates, the average for the 30-year fixed-rate loan remains more than double what it was a year ago, adding hundreds of dollars per month to financing costs for home buyers. This is prompting more buyers to retreat from the market: Mortgage applications to purchase a home are down 13% week over week and have fallen 37% compared to a year ago, the Mortgage Bankers Association reported this week. “Rates remain quite high compared to just one year ago, meaning housing continues to be more expensive to potential home buyers,” says Sam Khater, Freddie Mac’s chief economist.

Realtor.com® reports that home buyers have lost about $107,000 in buying power this year. That means buyers who budgeted for a $500,000 home at the start of the year may now be able to afford a property worth only $400,000 or less.

For buyers who are able to still financially move forward, more are turning to adjustable-rate mortgages to lock in a lower rate. However, that rate can jump significantly over time. ARM rates are about a percentage point lower than the 30-year fixed-rate mortgage. The share of ARMs was 11.8% of mortgage applications last week, up from around 3% earlier this year, the MBA reports.

Will Higher Rates Spark More Urban Flight?

Home buyers may be tempted to expand their search criteria to find places that offer greater affordability farther away from city centers. Nadia Evangelou, senior economist and director of forecasting for the National Association of REALTORS®, notes that rural areas, which are seeing migration gains, continue to be a prime target for buyers. “With mortgage rates near 7%, many people are looking for more affordable homes in less dense areas,” Evangelou writes on the Economists’ Outlook blog. In general, she notes, homes are about 50% less expensive in rural areas and about 20% less expensive in the suburbs than in urban centers.

Freddie Mac reports the following national averages for mortgage rates for the week ending Oct. 6:

• 30-year fixed-rate mortgages: averaged 6.66%, with an average 0.8 point, falling slightly from last week’s 6.70%. Last year at this time, 30-year rates averaged 2.99%.
• 15-year fixed-rate mortgages: averaged 5.90%, with an average 1 point, dropping from last week’s 5.96% average. A year ago, 15-year rates averaged 2.23%.
• 5-year hybrid adjustable-rate mortgages: averaged 5.36%, with an average 0.3 point, increasing from last week’s 5.30% average. A year ago, 5-year ARMs averaged 2.52%.

Freddie Mac reports commitment rates along with average points to better reflect the total upfront cost of obtaining the mortgage.

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Despite an unexpected jump in new construction in September, demand for new homes is falling due to high prices and mortgage rates. Builders are lowering their asks to boost buyer traffic.

Even as demand for new homes fizzles—about a quarter of homebuilders are reducing their prices to attract more buyers as foot traffic falls—single-family construction jumped 3.4% in August, the Commerce Department reported Tuesday. Economists are calling it a “surprising bounce back” after five consecutive months of declines.

Still, builder sentiment fell in September to its lowest level since 2014, according to data from the National Association of Home Builders. Rising mortgage rates, which topped 6% last week, and construction delays due to supply chain disruptions are among builders’ top concerns, the NAHB’s report shows. More than half of builders surveyed say they are using incentives to bolster sales, including offering mortgage rate buydowns, free amenities and price reductions, according to the NAHB/Wells Fargo Housing Market Index.

Lawrence Yun, chief economist for the National Association of REALTORS®, lays the blame for the new-home market’s slump squarely on mortgage rates. “However, this month’s increase in housing starts implies that builders still see profit opportunities, even as they concede on prices,” Yun says. “Material prices, including for lumber, have been moderating, and fully completed homes are selling fast.” Unfinished homes that remain under construction are the ones sitting on the market for long periods, Yun adds.

The NAHB agrees with Yun’s assessment. “Buyer traffic is weak in many markets as more consumers remain on the sidelines due to high mortgage rates and home prices that are putting a new-home purchase out of financial reach for many households,” says Jerry Konter, the NAHB’s chairman. “In another indicator of weakening market, 24% of builders reported reducing home prices, up 19% last month.”

NAHB Chief Economist Robert Dietz adds that the “housing recession” shows few signs of abating as builders continue to grapple with elevated construction costs and buyers now face 6% mortgage rates.

Home building permits—a gauge of future construction—fell in August to the slowest pace in more than two years, the Commerce Department reports.

Multifamily Properties Continue to Shine

Meanwhile, multifamily construction climbed to its best monthly performance in 35 years. “Apartment demand has been strong, with rents rising at a historically high pace,” Yun says. “Those consumers unable to qualify for a mortgage at higher interest rates are renewing their rental leases. Job creation is also boosting the rental demand.” Construction on multifamily dwellings surged 28% in August to an annual pace of 640,000 units, the Commerce Department reports.

Still, builders remain worried. The Federal Reserve meets on Wednesday and is expected to raise its benchmark interest rate by another 75 basis points in an effort to tame inflation. Housing analysts are concerned about the further impact that could have on mortgage rates.

However, some economists point to the stubborn housing shortage as a saving grace that could keep the real estate market from a deep downturn. By some estimates, the nation was short about 5 million homes before the onset of the pandemic. “The shortage is not going away soon,” Yun says. “The near-term single-family outlook is complicated due to high mortgage rates. But the long-term outlook for homebuilders is bright due to the need to build more to fully relieve the housing shortage.”

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There’s some encouraging news in NAR’s latest housing report, though sales of existing home are still falling amid economic uncertainty.

Home sales continued sliding in September as home buyers retreat from the market amid near-7% mortgage rates and mounting recession fears. Total existing-home sales—comprising transactions for single-family homes, townhomes, condos and co-ops—dropped 1.5% last month compared to August and were down nearly 24% year over year, the National Association of REALTORS® reported Thursday.

Meanwhile, the Commerce Department reported this week that housing construction is significantly waning, and home builders warn of more pullbacks ahead. Plus, mortgage applications to purchase a home plunged 38% last week from the same time a year ago, the Mortgage Bankers Association reports.

“The housing sector continues to undergo an adjustment due to the continuous rise in interest rates, which eclipsed 6% for 30-year fixed mortgages in September and are now approaching 7%,” NAR Chief Economist Lawrence Yun says. “Expensive regions of the country are especially feeling the pinch and seeing larger declines in sales.”

However, despite weaker sales, bidding wars remain strong because of limited inventory. More than a quarter of homes on the market are selling above list price, Yun says. “The current lack of supply underscores the vast contrast with the previous market downturn from 2008 to 2010, when inventory levels were four times higher than they are today,” he adds.

Further, home prices are proving resilient against the market slowdown. The median price for an existing home across all housing types was $384,800 in September, up 8.4% compared to a year ago. All four major regions of the U.S. saw prices climb. Still, the median home price has fallen from a record high of $413,800 in June. NAR notes that the decline follows typical seasonal trends.

Borrowing costs are one of the biggest challenges home buyers are facing. “Repeat buyers who have equity to roll into a home purchase are in a much better position than first-time buyers who are facing not only higher prices and rising mortgage rates—but also challenges saving for a down payment,” says Lisa Sturtevant, chief economist for Bright MLS. “Sellers are also on the sidelines during this transitioning housing market. Sellers are often buyers, so rising borrowing costs also impact their decisions.”

A Closer Look at the Numbers

The following are some additional key indicators from NAR’s September housing report:

• Time on market inched up, though 70% of homes still sold in less than a month. Properties typically were on the market for 19 days, up from 16 days in August and 17 days year over year.
• Total housing inventory fell 2.3% month over month and 0.8% compared to a year earlier. Unsold inventory was at a 3.2-month supply.
• First-time buyers comprised 29% of sales, up slightly from 28% a year ago.
• Individual investors and second-home buyers accounted for 15% of home sales, up from 13% a year earlier. Investors and second-home buyers tend to make up the biggest bulk of cash sales, which accounted for 22% of transactions.
• Foreclosures and short sales ticked up slightly but still made up a small portion of the housing market at 2% of sales. That’s up from 1% in August.

Here’s a closer look at how existing-home sales fared across the country in September:

• Northeast: Sales fell 1.6% from August, reaching an annual rate of 610,000. That’s down 18.7% from a year earlier. Median price: $418,500, an increase of 8.3% year over year.
• Midwest: Sales dropped 1.7% from August, reaching an annual rate of 1.14 million. That’s down 19.7% from a year ago. Median price: $281,500, up 6.9% year over year.
• South: Sales fell 1.9% from August, reaching an annual rate of 2.08 million. That’s down 23.8% from a year ago. Median price: $351,700, up 11.8% year over year.
• West: Sales held steady compared to August, maintaining an annual rate of 880,000. However, existing-home sales are down 31.3% from a year ago. Median price: $595,400, up 7.1% year over year.

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Forced to slow down construction as buyer demand plummets, builders predict lower home starts through 2023.

Builders are pulling back as the new-home market stalls, and a slowdown in construction is projected to last through 2023. In a housing market already sorely lacking inventory—which is leading to falling home sales—this isn’t good news for buyers hoping for an improvement in home affordability.

Single-family home starts dropped in September and were down 5.6% since the beginning of the year, the Commerce Department reported this week. Multifamily construction, which had been a bright spot in the new-home market, now also is slowing, dropping 13.2%.

Robert Dietz, chief economist for the National Association of Home Builders, warns that expectations for further interest rate hikes from the Federal Reserve likely will further dampen new-home production. “2023 is forecasted to see additional single-family building declines as the housing contraction continues,” he says. “While some analysts have suggested that the housing market is now more ‘balanced,’ the truth is that the homeownership rate will decline in the quarters ahead as higher interest rates and ongoing elevated construction costs continue to price out a large number of prospective buyers.”

Builders are blaming rapidly rising mortgage rates, ongoing supply chain disruptions and affordability challenges for the rapid pullback in the new-home market. “High mortgage rates approaching 7% have significantly weakened demand, particularly for first-time and first-generation prospective home buyers,” says NAHB chairman Jerry Konter. “This situation is unhealthy and unsustainable. Policymakers must address this worsening housing affordability crisis.”

Builder sentiment about selling conditions and buyer traffic has fallen to its lowest level since 2012, excluding the first two months of the pandemic in 2020, according to the NAHB/Wells Fargo Housing Market Index.

Facing an Even Worse Housing Shortage

“It is understandable for homebuilders to be cautious in light of slowing home sales and recent private sector data that indicates softening lease signings for new apartments,” says Lawrence Yun, chief economist for the National Association of REALTORS®. However, he notes, the current annualized rate of 1.44 million new units is lower than the historical average of 1.5 million. Maintaining the historical average is necessary to accommodate the rising population, Yun says. Meanwhile, the rental vacancy rate of 5.6% nationwide is at a 30-year low, and the homeowner vacancy rate of 0.8% is at a 40-year low. New listings are slowing nationwide at a time when many homeowners are reluctant to sell and give up the 3% mortgage rates they secured in the last few years. “When mortgage rates retreat after inflation is tamed in the coming years, we could again encounter an acute housing shortage,” Yun says.

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NAR Chief Economist Lawrence Yun paints a picture of what could happen with borrowing costs once it passes a critical threshold.

Mortgage rates remained just shy of 7% this week—the 30-year fixed rate loan is at 6.94%—which could be a “new normal” after recent rapid increases in borrowing costs, says Nadia Evangelou, senior economist and director of forecasting for the National Association of REALTORS®. Mortgage rates have been hovering near 7% for the last month.

Higher mortgage rates are prompting home buyers to adjust their price points so they don’t go over budget. A year ago, a home buyer looking to spend about $1,500 on a monthly mortgage payment could afford a $380,000 home, says Lisa Sturtevant, chief economist for Bright MLS. Today, with mortgage rates more than double what they were a year ago, that budget has dropped to $250,000. “In many areas of the country, homes in this price range don’t exist,” she says. First-time home buyers may be hit particularly hard because they don’t have equity to roll into a new home purchase, Sturtevant adds.

The heights that mortgage rates have reached caught the housing market off guard. “At the beginning of the year, it seemed very unlikely that mortgage rates would push past 6%,” Sturtevant says. “Now the question is how high will they go? A lot of the answer depends on how aggressive the Federal Reserve is going to go on rate hikes in its next two meetings. But the impacts of the Federal Reserve’s actions are crystal clear: The Fed will continue to raise rates in an attempt to tamp down inflation, even if it causes pain in the short term.”

NAR Chief Economist Lawrence Yun warned at the recent National Association of Real Estate Investors conference in Atlanta that mortgage rates could rise up to 8.5%, “which would be another big shock to the housing market.” With inflation outpacing wage growth, the typical family is spending more than 25% of their income on mortgage payments, Evangelou writes at the association’s blog, Economists’ Outlook. “Including other expenses, such as mortgage insurance, home insurance, taxes and expenses for property maintenance, homebuying costs exceed 30% of a typical family’s income,” she notes. Many financial experts consider households in this situation to be cost-burdened.

Mortgage rates at 7% were typical in the mid- to late-1990s and early 2000s. But home buyers today are facing high inflation and more expensive home prices. “The 30-year fixed-rate mortgage continues to remain just shy of 7% and is adversely impacting the housing market in the form of declining demand,” says Sam Khater, Freddie Mac’s chief economist. “Additionally, homebuilder confidence has dropped to half of what it was just six months ago, and construction—particularly single-family residential construction—continues to slow down.”

Freddie Mac reports the following national averages with mortgage rates for the week ending Oct. 20:

• 30-year fixed-rate mortgages: averaged 6.94%, with an average 0.9 point, rising from last week’s 6.92% average. Last year at this time, 30-year rates averaged 3.09%.
• 15-year fixed-rate mortgages: averaged 6.23%, with an average 1.1 point, rising from last week’s 6.09% average. A year ago, 15-year rates averaged 2.33%.
• 5-year hybrid adjustable-rate mortgages: averaged 5.71%, with an average 0.4 point, dropping from last week’s 5.81% average. A year ago, 5-year ARMs averaged 2.54%.

Freddie Mac reports commitment rates along with average points to better reflect the upfront cost of obtaining the mortgage.

©National Association of REALTORS®
Reprinted with permission

Despite signs of a housing recession, some buyers will be back to try again.

The housing recession is here, but it’s not what you might think. There’s very little distress in the market, with less than 1% of home sales in foreclosure or needing a bank-approved short sale. Owners’ aggregate housing wealth, the asset valuation minus the outstanding mortgage, is at an all-time high of $32.1 trillion, a gain of $8.5 trillion since the pandemic began. A typical homeowner’s wealth has jumped to an estimated $320,000 versus a typical renter’s wealth of $8,000. Real estate investors are also gaining in terms of wealth and strong rent growth. There’s still a residual housing shortage. Inventory conditions are only modestly higher than the supertight conditions of a year ago. Home prices are up from a year ago in nearly every market across the country.

The economic recession refers to weaker and less income-generating economic activity. The housing recession is here because of reduced income for brokerage services and mortgage lending and the fall in home construction. Job cuts have been announced for people working in the housing industry. Consequently, the housing sector subtracted 0.7% from the gross domestic product in the second quarter. The GDP itself declined 0.9%.

The key reason for the housing recession was the sudden sharp rise in mortgage rates in the first half of the year. Mortgage rates perhaps overshot because of the uncertain outlook for consumer price inflation. However, with gasoline prices steadily falling and the U.S. dollar strengthening against other currencies, the inflation rate may already have peaked. Mortgage rates showed signs of stabilization in July and August. That means further home sales and construction declines could be over very soon. That’s not to say homes will sell like gangbusters, but sales will stabilize first and then resume modest growth as job creation in the broader economy brings about a new potential set of buyers. Some buyers who were priced out in early June may be ready to jump back into the market—a second-chance opportunity.

Housing Inventory Up

Total housing inventory for July was 1,310,000 units, an increase of 4.8% from June. At the current sales pace, unsold inventory sits at a 3.3-month supply, up from 2.9 months in 32% June and 2.6 months in July 2021.

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Reprinted with permission