The past year or so has seen one of the hottest housing markets in recent memory in many parts of the country. A combination of strong demand for housing that started during the pandemic and that has continued into 2022, coupled with a limited supply in some markets has been a perfect storm for housing price inflation. There have been many stories in the news about home sellers receiving multiple offers over their asking price within a few days of listing their home.

However, the Fed’s recent moves to raise interest rates to combat inflation have put a damper on the housing market.

Current State of the Housing Market in 2022

According to the National Association of Realtors as of May 2022:

• The median national home sales price exceeded $400,000 for the first time ever, ending the month at $407,000.
• Sales in three of the four regions tracked by the group fell month-over-month in May, year-over-year sales fell in all four regions.

Largely due to higher mortgage rates arising from the Fed’s rate increases, mortgage applications fell 5% in May compared to a year earlier. They also fell 4% from April of this year according to the Mortgage Bankers Association (MBA).

According to Jay McCanless SVP, Equity Research for Wedbush Securities, “We believe the housing market catalysts of millennial household formation and a lack of supply in for sale and for rent housing have not changed.”

He adds, “Demand appears to have slowed, at least temporarily, due to a 300bp increase in the 30-year mortgage rate from Dec. 2021 to mid-June 2022. Builders are adapting to the current situation using a mix of price cuts, mortgage rate buy downs and other incentives to stimulate demand and maintain affordability.”

How has the rise of interest rates impacted the housing market?

Clearly the increase in interest rates has put a damper on new home sales as mentioned in the MBA’s statistics on new mortgage applications above. According to Freddie Mac, the rate on a fixed-rate 30-year mortgage in May was 5.23%. This is up from 3.45% in January of this year, an increase of almost 52%. Rates on other types of mortgages have exhibited similar levels of increase as well.

According to a tweet from Freddie Mac economist Len Kiefer as quoted in Business Insider, “The U.S. housing market is at the beginning stages of the most significant contraction in activity since 2006. It hasn’t shown up in many data series yet, but mortgage applications are pointing to a large decline over summer. Purchase apps down 40% from seasonally adjusted peak.”

Will the housing bubble burst?

While rising mortgage interest rates have put a damper on demand for new housing in some areas, overall, the demand for housing remains strong. Experts have varying opinions, but many still feel that the housing market will remain strong in most areas of the country over the summer months.

Are soaring U.S. property prices here to stay?

Again, opinions vary among experts here. Some, like Freddie Mac’s Len Kiefer think that rising mortgage interest rates spell the end to high home prices as soon as this summer. Others concur that rising mortgage rates will put a damper on housing demand, but that this could take as long as a couple of years to come to fruition.

For now, in many parts of the country, inventories of homes for sale remain exceptionally low. In many instances, sellers can pick and choose their buyers based on their offer. Cash is king in many cases. Buyers are often forced to pay over the listing price of the home and often need to waive typical contingencies like having the home pass an inspection.

Outlook for the end of 2022 – 23

McCanless says, “We do not produce our own macroeconomic forecasts, but the forecasters we watch are divided along two tracks. The first track assumes we are headed for a recession which could drive housing starts lower year over year in 2023. The second track assumes moderate, low single digit percentage growth for housing starts year over year in 2023. Our thinking for 2023 is aligned with the second track because the speculative excesses of the great financial crisis, lax mortgage underwriting and rampant overbuilding, have not occurred in any noticeable measure during the current cycle.”

If you are looking to buy or sell a home, contact your Wedbush financial advisor to discuss options to help you ensure that the transaction is done in the most beneficial way for your overall financial situation.

 

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