While some buyers have moved on, others have called off their home search or given up altogether because rising costs have put the property out of reach.
“Affordability is the biggest issue in the housing market today, and higher rates will make that worse on a monthly basis,” said Skylar Olsen, chief economist at Zillow.
Mortgage rates will stabilize
The big surprise for those looking to buy a home during the first half of the year was how mortgage rates shot up so high and so fast. Interest rates for a 30-year fixed-rate mortgage rose from 3.22% in early January to a year-to-date high of 5.81% in June, according to Freddie Mac. weeks, average rates have been around 5.5%.
“Someone who buys the same house today that they wanted to buy last year will see a 50% increase in their monthly payment,” said Lawrence Yun, chief economist at the National Association of Realtors. “People’s incomes don’t increase by 50% in a year. Home buyers are frustrated. This year, they are in total disbelief that they don’t have the money to buy at a 6% mortgage rate.”
The cost of financing a home is so great that nearly 15% of people who signed a contract to buy a home in June backed out, according to Redfin. That’s the highest proportion of canceled home sales since April 2020, when the market all but ground to a halt due to the pandemic.
But Yun said that while mortgage rates may go up or down in the coming months, the biggest jumps have already happened.
“It is possible that we are outperforming mortgage rates,” he said.
Yun noted that mortgage rates may already have largely “valued” current and future interest rate increases from the Federal Reserve. He expects mortgage rates to settle at about 6% by the end of the year and home sales to normalize once mortgage rates become more stable.
Inventory will increase from last year.
As the market slows down, potential buyers who continue to search for a home will have less competition and more homes to choose from, offering more breathing room than the frantic market of the past two years.
Economists were largely on target with their home price projections for the first half of the year, with annual price growth peaking in the spring and moderating as the year progressed. But the sales number at this time of year is well below expectations, said Jeff Tucker, an economist at Zillow.
“Sales volume has been affected much more than prices,” he said. “Buyers put up with those mortgage rate hikes for longer than we thought, that kept prices up. But some buyers started to drop out.”
Yun said he anticipates 2022 sales to be down about 13% from last year.
The result, Tucker said, is that as sales volumes continue to drop, inventory will increase.
Increasing demand to buy a home over the last two years has led to a record low inventory of homes to buy and that has pushed up prices. In June, the inventory saw its first year-over-year change in three years. The number of homes available for sale at the end of June was up 9.6% from May and 2.4% from a year ago, according to NAR.
House prices will rise more slowly
But the pace of price growth has slowed of late. Median existing home prices increased 13.4% in June from a year earlier, compared to a 23% increase in home prices in June 2021, according to NAR.
In addition, the prices of new construction homes are falling. The median sales price of a newly built home fell to $402,400 in June, down from $444,500 in May, according to the US Census Bureau and the Department of Housing and Urban Development.
“This is the biggest crack yet in home price inflation,” said Robert Frick, corporate economist at Navy Federal Credit Union. “If existing home prices follow suit, we may finally see a break in the annual increases that have put millions of Americans out of the housing market.”
New construction homes represent approximately 10% of the transactions and existing homes the other 90%. And the prices of the vast majority of the market are not falling.
As higher mortgage rates reduce buyer demand, inventory will rise and sales will fall, which should help prices moderate the rest of this year.
“Houses may stay on the market longer, there will be more properties with price reductions,” Yun said. “Buyers who dig deeper can find a house at a price reduction or get a better price deal.”
Affordability will continue to be a challenge
But during the housing bubble, the lack of affordability was fueled by mortgages offering tempting interest rates as low as 1% that reset to a level homeowners couldn’t reliably afford. And in the 1980s, housing was unaffordable due to incredibly high interest rates, with 30-year fixed-rate mortgage rates ranging from 9% to more than 18%.
Today’s market is different, the researchers wrote. “The rise in housing costs is due to the combined impact of apparent underproduction between 2008 and 2020, failures in the housing supply chain since 2020, and increased demand since 2020.”
And that’s not likely to change much by the end of the year.
Sam Khater, chief economist at Freddie Mac, said he anticipates homebuyer demand will continue to cool to a more normal pace of activity, but the ability of many people to buy a home will remain difficult.
“The Federal Reserve’s action to help control inflation has created significant volatility in mortgage rates and, by extension, in the housing market,” Khater said. “Although home price appreciation will grow at a more moderate pace, home prices remain high relative to homebuyer income. Taken together, these factors are exacerbating affordability challenges and causing a slowdown.” in the housing market”.