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Confused about the housing market? Here’s what’s happening

How the Fed is affecting the housing market

The slowdown in the red-hot housing boom has been amazingly quick.

The US housing market surged during the pandemic as people headed home to find new places to live, boosted by record low interest rates.

Now, real estate agents who have reported influxes of buyers outside of open homes and back-floor bidding wars say homes are costing longer and sellers are being forced to lower their asking price range. their look.

That leaves both potential buyers and sellers wondering where they stand.

“As recession fears weigh on consumers’ outlooks, our survey shows that uncertainty is already deep in mind,” said Danielle Hale, chief economist at Realtor.com. of many buyers”.

Here are the key factors behind the volatile housing market.

Mortgage interest rate

The main driver of the slowdown is rising mortgage rates. The average interest rate on a 30-year fixed mortgage, by far the most popular product today, accounting for more than 90% of all mortgage applications, starting this year is around 3%. It is currently just above 6%, according to Mortgage News Daily.

That means someone buying a $400,000 home will have about $700 more in monthly payments than they did in January.

High price, low supply

Other drivers of the slowdown are high prices and low supply.

Home prices are now 43 percent higher than they were at the start of the coronavirus pandemic, according to the S&P Case-Shiller national home price index. The supply of homes for sale is growing, up 27% in early September from the same time a year ago, according to Realtor.com. While that comparison may seem large, it’s still not enough to make up for the years-long shortage of homes for sale.

Active inventory is still 43% lower than in 2019. New listings also fell 6% at the end of September, meaning potential sellers are now concerned as they see more homes sitting on the market. longer.

Residential property declines as usable equity decreases

Some buyers are hanging

However, buyers have not completely disappeared, despite the still expensive listing market and equally expensive rental market.

Realtor.com’s Hale said: “Data indicates that some home shoppers are looking for silver linings in the form of cooling competition for an increasing number of home sale options. “Especially for buyers who are getting creative, such as by exploring smaller markets, this fall could offer a relatively better chance to find a home within the budget. “

Yale's Robert Shiller says we may be looking at falling home prices across the country

House prices are finally starting to cool down. They fell 0.77% from June to July, the first monthly decline in nearly three years, according to Black Knight, a mortgage technology and data provider.

While the drop may seem small, it’s the biggest monthly drop since January 2011. It’s also the second-worst July drop since 1991, following a 0.9 percent drop in July 2010, during the Great Recession.

The woes of affordability

However, the drop in prices will do little to improve affordability due to rising mortgage rates. While rates fell slightly back in August, they rebounded sharply this week, becoming the most affordable week in 35 years.

It now takes 35.51% of median income to pay monthly principal and interest on the average home with a 30-year mortgage and 20% off. That’s up slightly from the previous 35-year high in June, when the payout-to-earnings ratio hit 35.49%, according to Andy Walden, vice president of research and corporate strategy at Black Knight.

For the five years before interest rates started to rise, that income-to-payment ratio was stable at 20%. Despite a sharp increase in home prices in 2020 and 2021, record low interest rates have offset the increase.

“Given the role affordability challenges play in changing housing market dynamics, the recent decline in home prices is likely to continue,” Walden said.

Housing market slows as mortgage rates hit 6.25%

A latest report from real estate brokerage Redfin shows that while homebuyer demand picked up slightly in August, the latest rise in mortgage rates over the past week has set it back. sleeping state. According to the report, fewer people searched for “homes for sale” on Google in the week ending September 3 – down 25% from a year earlier.

The Redfin Demand Index, which measures requests for home tours and other home-buying services from Redfin agents, shows that in the seven days ended September 4, demand rose 18 percent. from the 2022 low in June, but still down 11% from last year. five.

Daryl Fairweather, chief economist at Redfin, said: “The housing market always cools down this time of year, but this year I expect fall and winter to be particularly cold because of the lack of sales. rarer than usual”.

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