Housing market softens as stocks and interest rates change momentum

After a dizzying rise in real estate prices enriched and energized sellers buyers in frenzied bidding wars, there are signs that the US housing market is beginning to cool amid new inventory and higher interest rates.

“For Sale” signs are springing up in previously hot markets like San Jose, Chicago and Phoenix. The volume of monthly home sales in the United States has recorded double-digit declines over the past year, according to estimates from Zillow and the National Association of Realtors. In May alone, the number of homes sold is down 19% from the year-ago period, according to Zillow, and preliminary data suggests the decline was more pronounced in June.

“This year’s buyers are just a lot more savvy, and they deserve it because they’re going to pay more to buy the house,” said Daniel Valdez, agent at eXp Realty in Sacramento.

The slowdown has so far brought little relief to buyers. Instead, analysts say, a growing affordability crisis ― driven by the collision of inflation and rising interest rates ― is forcing many potential buyers to walk away.

This is because some sellers, concerned about the stratospheric gains of 2020 and 2021, which pushed the average house price up more than 40%, are reluctant to lower their expectations. And home values ​​continue to rise, up 19% on average in the year ending June, according to data firm Black Knight.

“The market is cooling, but that cooling has happened on the backs of buyers who have become discouraged, buyers who have been driven out of the market,” said Jeff Tucker, senior economist at Zillow. “People who thought they would join the party are being met with absolute carnage when it comes to affordability right now.”

Cooling housing market reflects broader shifts in the economy as policymakers struggle to reach high levels for decades inflation under control.

Low interest rates in 2020 and 2021 helped feed the surge in house prices since the start of the coronavirus pandemic in 2020. But the Federal Reserve reversed course this year after inflation spiked, making the price of food, fuel, housing and other essential products a dominant economic concern. The central bank raised its benchmark interest rate three times in 2022 and signaled that four more increases are pending. The most recent hike in June was three-quarters of a percentage point, the Fed’s biggest since 1994.

Higher rates mean higher borrowing costs: The average rate on a 30-year fixed-rate mortgage stood at 5.3% on Thursday, according to Freddie Mac, up from 2.9% a year ago year. It also coincides with a struggling stock market and higher costs for just about everything, making it harder to save for a down payment.

Calculate the cost of additional mortgages as interest rates rise

Analysts say the resulting “affordability squeeze” keeps many potential buyers out and leads to fewer transactions.

Rachel Payne, a public school teacher in Northern Virginia, said she recently gave up her search after her dream home fell through. She and her fiancé, a professional poker player, made a $1.05 million offer on a four-bedroom home in Alexandria’s Belle Haven neighborhood, but the seller wanted to waive an inspection.

It seemed too risky to them and they turned it down, she said. A week later, they saw it selling for the same price.

“It’s a really terrible time to be a first-time home buyer,” said Nicholas Gerli, founder and managing director of Reventure Consulting.

Ali Wolf, chief economist at Zonda, says signs of cooling are everywhere: there’s a lot more inventory in some places the residences sit in the market longer, and many sellers are reducing their asking price to generate interest, she said.

“What we’re seeing today is that buyers actually have a limit,” Wolf said. “Potential home buyers have reached the point where they are intentionally exiting the housing market waiting to see what happens next, or are being forced out of the housing market due to the higher costs of home ownership. property.”

Housing inventory, which refers to the number of active listings, has ballooned in some of the nation’s most expensive metro areas, according to data from Redfin. It rose 47% in Denver, 43% in Oakland, Calif., and 10% in San Jose.

Some markets that have transformed during the pandemic have also held back, says Eric Finnigan, principal at John Burns Real Estate Consulting.

Boise, which has become a pandemic haven for its cheap real estate and proximity to the Rocky Mountains, appears to have found its ceiling, Finnigan said. Home values ​​there skyrocketed 57% in 2020 and 2021 as people flocked The largest city in Idaho. But prices rose just 3% between January and May, marking a turnaround that Finnigan called “superb”.

Many first-time buyers who have secured a home since 2020 have ended up paying more than they thought it was worth or turned to family members for help.

After renting for just under a decade, Myles Hughes, 32, wanted a place of his own. Late last year he got married and moved from Florida to Albuquerque for a change of scenery.

Hughes, a site manager at a space rental company and an independent actor and filmmaker, said he was outmaneuvered by other house hunters at every turn.

He visited dozens of properties over the course of four to five months, he said, but many of his strong competitors were swept off the market within days. He lost six properties, he said, even as he submitted offers quickly and increasingly above the asking price. As the research dragged on for months, interest rates continued to climb, as did asking prices, highlighting that it often takes time for sellers to adjust to new economic conditions and the tight budgets provoked by buyers. by the Fed.

It was offer #7 that won Hughes his new three-bedroom, two-and-a-half-bathroom home. But it took the help of his father, who put in the money for a cash offer. “We couldn’t afford to fight so much in the bidding wars,” he said.

The lack of affordable options has frustrated buyers and sellers, analysts said.

The age-old “30% rule,” a financial planning maxim that a person shouldn’t pay more than 30% of their income in real estate, is upset accordingly. Black Knight reports that the typical payment-to-income ratio, based on today’s higher interest rates and still high prices, has climbed 24% to 36% since January. By this measure, housing is at its least affordable point since the early 1980s.

Brian Brackeen, who heads Cincinnati-based venture capital firm Lightship Capital, has witnessed the changing dynamics of the housing market. He bought his own house late last year, then bought her daughter her first home in Tulsa in April.

For his daughter’s house, the rate was much higher and the down payment considerations were more difficult, he said. He has also noticed a change in the attitude of sellers, where many are stubbornly clinging to high asking prices even as the market turns from their favor.

“If you’re a seller and you’re so close to the gold rush, you don’t want to give up that money when your friends sold for top dollar, day one with multiple offers,” he said. declared.

Brackeen also sees the pool of potential buyers changing.

“The world that today’s sellers are dealing with is more like their normal local market, not the old covid-fueled supermarket, where people from all over the country are entering each other’s markets and inflating the number of buyers at a certain place.”

In the end, Brackeen’s daughter’s house was appraised below the purchase price, so both parties had to give up several thousand dollars, he said. “The market moss isn’t what it used to be.”

Yiwen Lu and Kathy Orton contributed to this story.

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