The red-hot housing market is cooling off. A combination of higher interest rates and supply chain shortages are squeezing homebuyers. If these trends continue, the spring selling season may find buyers between a rock and a hard place.
The total value of the private residential real estate in the U.S. increased by a record $6.9 trillion to $43.4 trillion in 2021. Since the lows of the post-recession market, the value of housing has more than doubled. By this time in 2023, Zillow expects the typical U.S. home will be worth more than $400,000.
This year, demand for housing will remain tight and continue to outstrip supply. But there are headwinds for homebuyers as well. One of the larger casualties of the Fed’s intention to raise interest rates is the mortgage market.
Home mortgage interest rates have spiked over the last few months. At the beginning of 2022, the rate for qualified buyers was around 3% for 30-year fixed rate mortgages. Today, that same mortgage would cost 4.95%, according to Mortgage News Daily. During the past three weeks alone, according to Freddie Mac, we have seen the largest rise in mortgage interest rates since 1987.
In practical terms, a family that could manage $2,000/month in mortgage payments could have afforded the purchase of $424,000 at the beginning of the month. This week, thanks to the rise in interest rates, the home they can afford dropped to $375,000. You might ask how rates could have backed up so much when the central bank has only raised interest rates by 25 basis points in March.
The answer is that the Fed focuses on the short end of the interest rate curve. Mortgage interest rates, however, are determined by the long end of the curve. A 20- or 30-year mortgage rate is based on what investors believe the Fed, the economy and inflation will be in the future. Given that inflation is expected to continue higher in the months ahead, and that the economy is expected to slow, lenders see more risk ahead for home buyers. Add in the Fed’s stated intention to continue to raise interest rates several times this year (and maybe next year), there is no wonder that long-term interest rates for home mortgages are spiking higher.
For the last several years, demand for homes have outpaced supply. As such, home builders are having a hard time providing enough homes to the market. The present supply side problems besetting the construction industry, which were caused by the coronavirus pandemic, have added insult to injury.
A huge shortage of materials is plaguing companies’ ability to complete new homes. Lumber shortages have been well-publicized, but everything from siding, glass windows, large appliances and even garage doors have stretched delivery times from week to months. Those product shortages are acute and seem to be getting worse.
As mortgage rates continue to climb, it becomes harder for existing homeowners with low mortgage rates under 3% to sell and take on higher mortgage rates in order to buy a new home, which continues to cost more and more. This hesitancy further reduces the existing supply of housing stock available.
Home prices in the U.S. increased by 18.8% in 2021. That is considered an unsustainable level, but given the reduced level of inventory, most experts expect prices on homes to grow 16.4% or more in 2022. For homebuyers looking to purchase homes, the call seems to be do it sooner rather than later.