By Clare Trapasso
As we delve into the fall season, it's evident that the housing market is facing unique challenges that are affecting both buyers and sellers. High mortgage rates, which soared above 7% last month, have placed a substantial damper on the market, resulting in a sluggish pace. Buyers are finding it increasingly difficult to afford properties, while sellers are hesitant to list their homes, leading to a concerning shortage of available housing. This scarcity, in turn, has triggered a resurgence in home prices, prompting many prospective buyers to delay their pursuit of the American dream.
Mark Zandi, chief economist at Moody's Analytics, succinctly describes the situation, stating that the housing market is "weak and it's going nowhere fast." He adds, "I don't think it's going to get any better. But I don't think it's going to get any worse—because it can't get any worse."
One of the primary factors contributing to this stagnation is the scarcity of homes available for purchase. Many homeowners are also potential buyers, reluctant to give up the historically low mortgage rates they secured during the COVID-19 pandemic. Consequently, they are opting to stay put until rates become more favorable. This reluctance to sell exacerbates the housing inventory crisis, keeping prices high and sparking intense bidding wars as buyers compete for the limited selection of homes on the market.
Mortgage rates have surged to an average of 7.12% for 30-year fixed-rate loans in the week ending September 7, as reported by Freddie Mac. This is a substantial increase from 5.89% just a year ago and 2.88% two years ago. The result is that today's monthly mortgage payments are approximately 90% higher than they were merely two years ago, with most of this increase attributed to higher interest rates.
"At 7% mortgage rates, housing is just not affordable," remarks Zandi.
Ironically, these high mortgage rates and escalating home prices are a consequence of the U.S. Federal Reserve's efforts to curb inflation. Since last year, the Fed has been progressively raising its short-term interest rates, which typically influence mortgage rates. Therefore, when the Fed increases its rates, mortgage rates often follow suit. It remains uncertain whether the Fed has completed its tightening measures or if further rate hikes are imminent.
Robert Dietz, chief economist of the National Association of Home Builders, acknowledges the challenges ahead for the fall housing market, stating, "It's going to be difficult and challenging for those who have not been priced out to find limited choices."
However, amidst these challenges, there are glimmers of hope. August saw a slight increase in the number of homes listed on Realtor.com. New-home sales continue to perform strongly, and historically, there is less competition for homes during the fall season. Families with school-aged children have usually completed their moves, and many renters have renewed their leases, reducing the overall demand in the market.
Realtor.com® Chief Economist Danielle Hale emphasizes this opportunity for buyers, saying, "Fall does present this opportunity to buyers every year. I wouldn't say inventory is back, but it's a step in the right direction."
Despite the uncertainty, many economists anticipate that mortgage rates will remain high through the fall season. However, there is optimism that once the Federal Reserve concludes its primary inflation-fighting initiatives, mortgage rates may see a decline. In the event of an economic downturn resulting from these rate hikes, the Fed is likely to consider rate reductions, which could benefit homebuyers.
Nonetheless, it's essential for potential homebuyers not to wait indefinitely for lower rates. Dietz predicts that rates could fall to approximately 6% by the end of the next year. While mortgage rates are not expected to skyrocket or reach double digits, the current market conditions still pose challenges.
In terms of home prices, they have experienced a resurgence after a brief dip. While experts do not anticipate the extreme price increases seen during the pandemic, they do not expect significant price drops either. Moody's Zandi anticipates minor price declines this fall, with a dip of a few percentage points by next year, far less dramatic than the 30% drops seen during the Great Recession.
"Homes at current prices are completely unaffordable," says Zandi, adding that sellers may need to lower their prices to facilitate sales.
Danielle Hale expects prices to remain relatively stable, with little deviation from their current levels. However, some experts foresee modest single-digit price increases compared to the previous year.
Molly Boesel, principal economist at real estate data firm CoreLogic, explains that while price increases should be moderate, high mortgage rates will result in high monthly payments for buyers.
One positive aspect of the market is the increasing prominence of new construction. Due to the scarcity of existing homes for sale, buyers are turning their attention toward new construction. In July, nearly a third of all homes for sale were new construction, a significant departure from the historical average of 10% to 15%.
The diminishing gap in pricing between new and existing homes has also made new construction more appealing. The price difference between the two was only $30,000 in July, according to government and National Association of Realtors® data.
Furthermore, builders often have the ability to lower mortgage rates temporarily or permanently, saving buyers a significant amount of money. This can be accomplished through various buy-down strategies, such as a 3-2-1 buy-down, where the seller pays to lower a borrower's rate for the first three years of the mortgage. This can provide substantial savings, even if it's only temporary.
In conclusion, the current housing market presents unique challenges for both buyers and sellers. While high mortgage rates and home prices persist, there is hope that conditions will improve in the future. For now, it's essential for prospective buyers to assess their needs and act accordingly, as waiting indefinitely for lower rates or prices may not be a viable strategy.
* The calculation compares the national median home list prices in August 2021 and August 2023 on Realtor.com. It also includes the average weekly mortgage rates from Sept. 2, 2021, compared with Aug. 31, 2023, for 30-year fixed-rate loans from Freddie Mac. Average weekly mortgage rates are from Freddie Mac. This assumes buyers put down 20% and doesn’t include property taxes, insurance costs, and homeowners association fees.
Find the Original Article Here: https://www.realtor.com/news/trends/is-the-fall-housing-market-really-going-nowhere-fast-what-buyers-and-sellers-need-to-know/