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 its aggressive campaign to subdue soaring prices. Central bankers are raising the cost of borrowing for businesses and households to slow spending, which in turn is supposed to slow inflation. But the Fed’s tinkering also runs the risk of tipping the nation into recession and icing consumers — who as a result have 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. The median price on an existing single-family home was just over $423,000 in June, according the national Realtors group, up more than 13 percent from this time last year.
“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.”
The coronavirus pandemic, geopolitical turmoil, and a host of other issues have created a mixed-message economy. Hiring is slowing but still very strong. Inflation is at the highest level in 40 years but not deterring spending. Many economists anticipate a recession later this year or next.
Rising costs are reshaping spending habits and forcing many families to set aside more of their household budgets for staples like housing, gasoline and groceries. Americans’ fuel costs were 3.6 percent higher in June than they were in May, for example, as the national average for a gallon of gas breached $5.
Mortgage rates have climbed markedly since the Federal Reserve began raising its benchmark interest rate in March. The central bank has already moved the needle higher three times in 2022 and made clear that more increases are coming, starting July 27.
The average rate for a 30-year fixed rate mortgage is 5.5 percent, according to Freddie Mac, up 2.6 percentage points from a year ago — a difference that can add hundreds of dollars to a monthly mortgage payment. The rise 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.”
The housing market, at last, appears to be cooling off
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, existing home prices continue to rise. And 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 Home Builders 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, home buyers 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.”
The looming question is whether the economy shrank again in the second quarter of 2022, after unexpectedly contracting in the first three months of the year. The next round of gross domestic product figures will be released July 28.
Kathy Orton contributed to this report.