It’s been a year of watershed moments in real estate, and not a good one.
The housing market index, a closely watched industry measure that gauges the outlook for home sales, fell to 33 in November on a hundred-point scale, its lowest level in a decade, except of the first dystopian month of the pandemic. Anything less than 50 years old means trouble.
A month earlier, interest rates on a standard 30-year mortgage topped 7%, capping the biggest single-year increase in at least 50 years.
“Just to give you an idea of how far we’ve come, we started the year around 3%,” said Michael Fratantoni, chief economist at the Mortgage Bankers Association. “It’s just been a wild ride.”
According to Nadia Evangelou, senior economist at the National Association of Realtors, the difference between a 3% interest rate and a 7% interest rate amounts to $1,000 more for a monthly mortgage payment on a priced American house. medium.
Interest rates fell to 6.3% this month, sowing new hope for the few remaining buyers in a declining housing market.
After an unprecedented campaign of rate hikes, Federal Reserve Chairman Jerome Powell signaled that the central bank would ease.
This is one of the reasons why mortgage rates are falling. The other is more sober.
“We, others, many market players are predicting a recession in the United States and many other places around the world,” Fratantoni said. “That puts downward pressure on rates.”
The housing market is already in a recession and has been since mid-summer, according to the National Association of Home Builders, which publishes the Housing Market Index with Wells Fargo.
“The index has fallen for 11 straight months,” said Robert Dietz, chief economist for the homebuilders group. “This will be the first calendar year in 11 years that single-family homes start up,” a measure of new home construction, “will total less volume than the previous year.” He predicts a double-digit drop.
Where the housing market goes, the broader economy follows. Dietz, Fratantoni and other industry players expect the country to tip into recession, a state of economic malaise generally defined as two successive quarters of decline.
“The housing market is driving the United States into recession, and it’s likely to come out of it,” Fratantoni said, with the recovery arriving around the middle of next year.
And what does all this mean for owners?
For the most part: stay put. The vast majority of homeowners are fortunate to have secured fixed rate mortgages at historically low interest rates of less than 4%. There is little incentive to sell.
“Anyone with a fixed rate mortgage who got their loan before the middle of this year is in very good shape,” Fratantoni said.
A small percentage of homeowners, about 1 in 10, may be in trouble. They hold variable rate mortgages that will soon adjust to current rates, if they haven’t already.
“These people are going to be affected,” said Steven Carvell, professor of finance at Cornell University.
In the years leading up to the Great Recession of 2008, variable rate mortgages accounted for up to 35% of the home loan market. When prices fell, many borrowers owed as much as their home was worth, if not more.
Economists don’t expect such a slump in 2023. Nearly half of all current mortgages are ‘equity-heavy’: Borrowers owe less than half of what their homes are worth, according to ATTOM, an analyst immovable.
Things could go wrong if house prices fall. But economists don’t expect that to happen in the current downturn.
“To be sure, we’re going to see a slight increase in foreclosures,” Dietz said. “But we don’t expect that anywhere on the scale of last time.”
Over 6 million families lost their homes to foreclosure during the Great Recession. This crisis followed years of overbuilding, Dietz said, leading to a surplus of housing and a drop in home values.
Recent years, on the other hand, have seen “a huge amount of underbuilding”, he said, leaving a deficit of available housing.
Mortgage delinquency rates, a measure of impending foreclosures, are at historic lows, Fratantoni said.
In the current housing recession, Fratantoni said, “if you have a landlord who sees the market weakening, they just take their property off the market.”
The Fed raised interest rates, in part, to sow a “correction” in an overheated housing market. Home prices rose more than 40% between the start of 2020 and June 2022, according to the US National Case-Shiller Home Price Index.
It worked. The index has fallen for three straight months, the biggest drop in a decade.
Home prices remain higher today than they were a year ago, but that could change. Redfin, the real estate brokerage, predicts prices will fall 4% in 2023, to a median value of $368,000.
“That doesn’t necessarily mean everyone’s home value is starting to drop,” said Daryl Fairweather, chief economist at Redfin. “Luxury homes will drop the most in price. Affordable homes will likely hold their value a little better.
Analysis by Redfin suggests that home prices may hold up better in areas of the Midwest and Northeast where values have risen less dramatically during the pandemic years. Prices could fall further in pandemic boom towns such as Phoenix; Austin, TX; and Boise, Idaho.
Housing analysts expect a much steeper drop in home sales: a 15% drop in 2022 and a 7% drop in 2023, according to the National Association of Realtors.
“We’ve seen a record share of homes taken off the market over the past 12 weeks,” Fairweather said. Potential sellers “are not willing to lower the price. They prefer to stay home and wait.
For real estate agents and home sellers nationwide, “last year was the best year since 2006,” Evangelou said.
This year is one of the worst.
Interview requests from The Hill to several prominent real estate agents on Monday either went unanswered or were politely declined. A Chicago agent explained in an email that his sellers are “mostly waiting to be listed until next year.”
Buyers are also hurting, buffeted by high interest rates, inflated asking prices and a dwindling inventory of homes for sale.
First-time home buyers face particularly high risks. They cannot tap into a pool of equity to fund a large down payment. Rents have gone up, making it harder to save any down payment.
First-time buyers now make up just 26% of all home buyers, the lowest share in recent years, according to a nationwide survey by the National Association of Realtors.
As 2022 looks to 2023, all eyes will be on interest rates. Many observers say the highest rates are yet to come.
“Our forecast has them peaking around 7 1/2%,” Dietz said.
But Redfin predicts rates will eventually come down, slipping to 5.8% by the end of 2023.
At an interest rate of 5.8%, a potential buyer with a monthly budget of $2,500 could afford a house for $406,250. At a rate of 6.5%, the same buyer could only spend $383,750. Just a year ago, with a rate of 3%, the buyer could spend $517,000.
And yet, despite all the uproar triggered by recent rate hikes, an interest rate of 6 or 7% is not particularly high, historically speaking.
“It’s not in the wild range,” Carvell said of Cornell. “We have been in the crazy range. This is the fact.
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