July 20th, 2022 2:37 PM by Jackie A. Graves
Existing-home sales have dropped five straight months as rising interest rates and recession fears hold off would-be buyers.
The U.S. housing market continued to soften in June, with home sales falling and mortgage demand hitting a 22-year low as rising interest rates and recession fears held off would-be buyers.
Existing-home sales are down 5.4 percent compared with May, according to data released Wednesday by the National Association of Realtors, marking a fifth straight month of declines. But they’ve tumbled 14.2 percent compared with June 2021.
The data reinforce signals the nation’s once-frenzied housing market is in the midst of a cool-down and may portend its next phase as the Federal Reserve presses an aggressive campaign to tamp down soaring inflation. While central bankers are specifically raising interest rates to cool an overheated economy, such tinkering also runs the risk of tipping the nation into recession and icing consumers — who as a result have far less buying power — out of the housing market.
“Falling housing affordability continues to take a toll on potential home buyers,” said Lawrence Yun, NAR’s chief economist. “Both mortgage rates and home prices have risen too sharply in a short span of time.”
Mortgage demand fell more than 6 percent last week, to the lowest level since 2000, according to data published by Mortgage Bankers Association.
“Purchase activity declined for both conventional and government loans, as the weakening economic outlook, high inflation, and persistent affordability challenges are impacting buyer demand,” said Joel Kan, MBA’s associate vice president of economic and industry forecasting, in a statement Wednesday. “The decline in recent purchase applications aligns with slower home building activity due to reduced buyer traffic and ongoing building material shortages and higher costs.”
Mortgage rates have climbed markedly since the Federal Reserve began raising its benchmark interest rate in March. With consumer prices still rising, the Fed has made clear additional rate hikes are coming, starting July 27. Higher rates lead to higher borrowing costs, shrinking what home buyers can afford.
The average rate for a 30-year fixed rate mortgage is 5.5 percent, according to Freddie Mac, up from 2.6 percent a year ago. It also coincides with a flattened stock market and higher prices for just about everything, making saving for a down payment even more difficult. The resulting squeeze on affordability is locking buyers out and leading to fewer deals.
“Existing-home sales continue to slide as the consumer pulls back amid multi-decade lows in affordability,” said Peter Essele, head of portfolio management for Commonwealth Financial Network. “Budgets are tighter than ever as the consumer combats runaway inflation, and housing is one area that’s falling victim to waning demand.”
Sellers should theoretically adjust to the new landscape by lowering asking prices to help offset higher mortgage rates. But such shifts can take time, as sellers may be reluctant to lower their expectations after watching neighbors extract top-dollar from desperate buyers at the heights of the frenetic pandemic-era housing market.
Meanwhile, home prices have continued to rise. The median price on an existing single-family home was just over $423,000 in June, according to the national Realtors group, up more than 13 percent from this time last year. New homes are also getting marked up.
“A year ago, nearly one-quarter of new homes were priced under $300,000. Today, it’s 10 percent,” said Jerry Konter, the chair of the National Association of Homebuilders and developer from Savannah, Ga., during a Senate Finance Committee hearing on Wednesday.
Still, homes that are priced competitively are selling with record speed. Properties typically lasted 14 days on the market in June, down from 16 days in May and from 17 days last summer, according to the NAR report. That’s the shortest time-on-market period the group has observed since it began tracking the metric in 2011. Nearly 9 in 10 homes sold last month were on the market for less than a month, the data showed.
“Homes priced right are selling very quickly, but homes priced too high are deterring prospective buyers,” Yun said.
Jeffrey Roach, chief economist for LPL Financial Chief, said that while the outlook is bleak, the vast majority of homes are selling quickly. “This indicates core underlying demand for home-buying in the midst of a slowing economy,” he said.
Mortgage rates may continue to climb.
The Bureau of Labor Statistics released data last week showing the consumer price index was 9.1 percent higher in June than it was a year ago, indicating that inflation has yet to peak. The Fed is expected to announce it will raise rates again by 0.75 percentage points next week to combat the inflation surge. In turn, homebuyers and other consumers looking to borrow money to finance cars and other major purchases will face more expensive loans.
How much more mortgage rates will swell depends on how aggressively the Fed will chase down rising prices and if central bankers believe the high inflation environment is subsiding.
“If consumer price inflation continues to rise, then mortgage rates will move higher,” Yun said. “Rates will stabilize only when signs of peak inflation appear. If inflation is contained, then mortgage rates may even decline somewhat.”
Source: To view the original article click here