- The fight against inflation has led to a surge in mortgage rates.
- Many prospective buyers are putting their homeownership dreams on pause.
Home prices are finally coming down to earth but that does not mean the US real estate market is back on track.
In fact, both would-be buyers and sellers are in a tough spot – and neither is coming out on top.
"Inflation and high mortgage rates are taking a bite out of homebuyer budgets," Daryl Fairweather, the chief economist at real estate brokerage Redfin, said in a statement. "Few people are able to afford homes costing 50% more than just two years ago in some areas."
That's because Federal Reserve's fight against inflation has accomplished some of what it's supposed to achieve; it's made borrowing more expensive.
An increase in interest rates led to a run up in mortgage rates, which has slowed home sales and therefore price growth. Mortgage rates have reached levels not seen since the mid-2000s. With the average 30-year fixed rate mortgage sitting at 6.94%, many new homebuyers are facing monthly payments that have doubled since 2021 — offsetting any affordability gained through declining prices.
The steeper decline in affordability has put Americans in a tough spot — it's not a good time to be a homebuyer or a home seller.
It all comes down to the fact that the higher mortgage rates rise, the less affordable homeownership is for borrowers. With fewer Americans able to afford a new home purchase, sellers are cutting their listing prices or refraining from selling their properties at all. The catch-22 has created a lose-lose scenario for many homebuyers and sellers.
"Some sellers are pricing lower, and some homeowners are staying put because they're nervous they won't get a good offer or they're hesitant to give up their low mortgage rate," Chen Zhao, economics research lead at Redfin, said in a statement, adding that "because the number of homes for sale is no longer rising, buyers' newfound bargaining power is reaching its limit."
Indeed, homebuying activity is slowing the higher that mortgage rates rise.
In September, sales of previously owned homes fell for the eighth consecutive month to a seasonally adjusted annual rate of 4.71 million units, according to the National Association of Realtors. Not only is this down 1.5% from August's pace and a 23.2% decline from the year-ago rate — it also marks the slowest rate of sales since September 2012.
"With rates sitting above 6.5% for three weeks and no indication they'll come down before the end of the year, people are only buying and selling homes if they need to," Zhao said in a statement, adding that while prospective buyers wait for mortgage rates to come down, it may take a few months for home sales to pick back up.
Those months could extend into 2023 as the Mortgage Bankers Association forecasts a possible decrease in rates during the first half of the year. However, if home sales were to pick back up, it would all hinge on the possibility of a recession in the broader economy.
According to the organization's researchers, if a recession were to materialize "mortgage rates would fall around 30 basis points from the baseline forecast level of 5.2%."
That could mean rates will possibly return to levels seen during the early months of 2022 — when 30-year fixed rates hovered around 4% — making homeownership more affordable for US buyers.