Mortgage rates highest since 2008 Housing crisis dampens sales

For the past two years, anyone with a home for sale could get virtually any asking price. Good or bad condition, in the cities as well as in the suburbs, apparently everything on the market had a line of eager buyers.

Now, in the space of a few weeks, real estate agents have gone from managing bidding wars to monitoring properties with no offers, and once-hot markets like Austin, Texas, and Boise, Idaho, are on the cusp. to experience sharp declines.

The culprit is rising mortgage rates, which have risen to their highest levels since the 2008 housing crisis in response to the Federal Reserve’s recent efforts to control inflation. Rising borrowing costs, adding hundreds of dollars a month to the typical mortgage payment and on top of two years of rising home prices, have pushed homebuyers eager to push their financial limits.

“We’ve reached the point where people just can’t afford a house,” said Glenn Kelman, chief executive of Redfin, a national real estate brokerage firm.

More than any other sector of the economy, housing — a purchase that, for most buyers, requires taking on a lot of debt — is particularly sensitive to interest rates. This sensitivity becomes even more pronounced when homes are unaffordable, as they are now. As a result, house prices and new construction are a central part of the Federal Reserve’s efforts to slow rapid inflation by raising interest rates, which the central bank has done repeatedly this year. But the Fed’s measures come with an inherent risk that the economy could slip into a recession if they stifle home purchases and development activity too much.

Although housing does not represent a huge amount of economic output, it is a booming industry that has historically played an outsized role in downturns. The sector operates on credit, and purchases of new homes are often followed by new furniture, new appliances, and new electronics which are major consumer expenditures.

“We need the housing market to bend to contain inflation, but we don’t want it to break because that would mean a recession,” said Mark Zandi, chief economist at Moody’s Analytics.

Home prices are still at record highs, and they will likely take months or more to fall – if they ever do. But this warning, which real estate agents often present as a shield, cannot hide the fact that demand has dropped considerably and the direction of the market has changed.

Sales of existing homes fell 3.4% in May from April, according to the National Association of Realtors, and construction is also down. Homebuilders who had scanned their inventory with elaborate sweepstakes now say their pandemic listings have shrunk to the point that they are lowering prices and sweetening incentives — like cheaper countertop and bathroom upgrades — to get buyers to cross the line.

“There was this collective belief that housing was invincible – that it was so undersupplied and demand was so high that nothing could stop price growth,” said Ali Wolf, chief economist at Zonda, a housing data and consulting company. “A very rapid rise in interest rates and house prices proved that theory wrong.”

It’s a sea change for a market that flourished soon after the initial shock of the pandemic, which for many people proved to be the perfect time to buy a home. Lowest mortgage rates have reduced borrowing costs, while the shift to home offices and Zoom meetings has opened up new swaths of the country to buyers who have struggled to enter the market near the jobs they want. used to go.

That sent prices soaring in remote suburbs and once-affordable places like Spokane, Wash., where a crush of new-home buyers decamped from expensive West Coast towns. People became so willing to travel long distances to buy a home that “the normal laws of supply and demand did not apply,” Mr Kelman said.

After two years of rapidly rising prices, however, places that once seemed cheap are no longer so. Home values ​​have risen about 40% in the past two years, according to Zillow, forcing buyers to push their prices higher and higher, even if they lack geography.

Now add mortgage rates, which have nearly doubled this year. And inflation, which eats away at the savings of some families by increasing household spending. And a wobbly stock market, which reduced the value of portfolios that many buyers intended to mine for a down payment.

Larisa Kiryukhin and her family have long since been driven out of the San Francisco Bay Area, where they had lived for decades. Ms Kiryukhin, 44, is a medical assistant who was tied to her hospital, but the pandemic has given her husband, who works in information technology, the flexibility to move to a more affordable city. So Ms. Kiryukhin changed jobs, and this year the couple and their two children moved to Tampa, Florida, hoping to buy a house.

In April, the family entered into a contract for a house for $425,000 and offered an interest rate of 4%. Then the closing date was extended because the seller wanted time to find a new home. Then interest rates jumped, adding about $700 to the monthly payment, and the family pulled out.

“I moved here just to buy a house, and it’s gone: the prices have gotten so high that we can’t afford it,” Ms Kiryukhin said.

The typical home buyer earns around $70,000 a year, according to Moody’s Analytics. A $600 per month increase in housing costs — roughly how much rising interest rates added to the typical mortgage payment — is more than most people can bear.

Steve Silbar, a real estate agent in Spokane, Wash., said he’s seen a sharp deterioration in interest from buyers looking for homes under $500,000. These buyers typically have less cash, so rising mortgage rates “took them out of the market,” he said.

Heather Renz and her husband, clients of Mr. Silbar, were about to buy a house for $360,000. Ms. Renz is her mother’s caregiver. To qualify for a mortgage, her husband, who works as a technician in an aerospace company, would withdraw money from his retirement account and bolster their down payment. But recent stock market declines pushed the amount he could withdraw below what they needed to qualify.

“We were three-quarters through the process,” Ms. Renz said.

The interest rate on a 30-year fixed-rate mortgage rose from 3.22% to 5.81% in the first week of January, according to mortgage giant Freddie Mac. Part of this adjustment anticipated future Fed interest rate hikes. Officials raised rates by three-quarters of a percentage point in June alone, the biggest increase since 1994, and signaled that an equally big move is on the table in July. Any other surprises could push mortgage rates even higher.

Inflation is rising at its fastest pace in 40 years, forcing the Fed to implement an aggressive policy to try to control it.

Since higher interest rates slow down large purchases made on credit, whether houses, cars or business equipment, they can limit demand and allow supply to catch up. , thus moderating price increases across the economy.

Jeanna Smialek contributed report.

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