Prices could flatten or even fall this year

Nothing has been able to slow soaring house prices of late, not even the highest inflation in 40 years. Will soaring mortgage rates achieve what many discouraged buyers and giddy sellers believe is impossible? Or will dozens of first-time buyers continue to be barred from home ownership?

Many homebuyers are reaching their financial limits just as the home buying season kicks off this spring. Rising costs of just about everything are eating away at down payment funds. Mortgage rates, which have risen nearly a point and a half over the past year and are expected to continue to rise throughout the year, are adding hundreds of dollars to the monthly payments of today’s buyers. today. And yet, house prices continue to climb while the number of properties for sale continues to decline.

Buyers today pay about 30% more for a home than they would have just a year ago taking into account these higher sale prices and mortgage rates. This is forcing many budding buyers to abandon the market and put their dream of home ownership on hold, as budgets can only stretch so far. Mortgage applications to buy a home fell 10.1% annually in the week ending March 25, according to the Mortgage Bankers Association.

Most real estate experts believe higher mortgage rates will force the price growth to slow down. Although this would mean the end of double-digit increases, prices would continue to rise, just a little slower. Some even think that prices could come down a little in the parts of the country where they have risen the most, which excludes locals.

“We’ve been capping the housing market for a while,” says Mark ZandiChief Economist at Moody’s Analytics.

“The first thing to fall is going to be home sales. People just can’t afford to buy,” he says. “Then we will see price growth start to slow. Ultimately, I expect price drops in some markets.

The Federal Reserve Bank of Dallas sounded the alarm when it warned of signs of a brewing housing bubble, as “purchases resulting from a ‘fear of running out’ can drive up prices and heighten expectations of sharp house price increases,” according to a recent post.

Americans worry about rising costs in all aspects of their daily lives. About 26% were struggling to pay their bills in February this year, according to the March installment of the Capital One Market Index. (The index looks at how the COVID-19 pandemic has affected Americans of different incomes over time.) Nearly half, 47%, say they’re worried about paying at least one bill next month.

This led nearly two-thirds, 62%, to say inflation has affected their spending, according to the index. Some of this is likely to trickle down to the housing market.

“Homebuyers need to be able to afford their mortgage payments and all the other things within their budget, [which is] harder and harder to do,” says® Chief Economist Danielle Hale.

What will happen to house prices?

High mortgage rates have yet to depress prices.

Prices could even rise, at least initially, as buyers rush to lock in properties before ending up with even higher rates. This could cause them to bid even bigger to win bidding wars, which would incentivize sellers to raise prices.

Nationally, median list prices rose 15.3% in the week ending March 26 from a year ago

However, many real estate experts are predicting that the party may be coming to an end.

“We have learned from history that prices can fall,” notes Hale. “The most important question is whether it will happen now. And it’s hard to say. »

With much higher mortgage rates, “housing is going to have to adapt. It is unclear whether this will mean lower prices or just slower price growth,” says Hale.

Zandi thinks prices will slow and even plunge between 5% and 10% in the most overheated real estate markets.

“The declines are going to occur in areas of the country that have grown the most, such as Boise, ID and Phoenix, the Southeast and Florida, and down to Texas,” Zandi says. These are the places where locals struggle to buy, especially when competing with deep-pocketed investors.

“These are the markets that have seen the most stratospheric price gains, and that’s where we’ll see the most upside,” Zandi says.

“Medium-sized markets could be hit the hardest as middle-class buyers suffer from inflation and rising housing prices,” he adds. “The lower end of the market will probably do better because there just aren’t many affordable homes for sale. These sales should therefore remain sustained.

What could keep prices high and growing?

Before aspiring buyers get too excited, they need to realize that there are forces at play that could keep home prices high.

Most important is the historic housing shortage. There are still many more future owners than houses for sale. Builders cannot build new homes fast enough, a problem that has been exacerbated by labor shortages, global supply chain delays and local zoning laws. And there is more demand for housing, as millennials have hit their peak in home buying.

But despite all those interested buyers, sellers might be more reluctant to list their homes, leading to Even less goods placed on the market. This is because most sellers are also buyers. And with higher house prices and mortgage rates, many won’t be able to afford to move into bigger, newer homes. Others might find it will cost them more to downsize to a smaller home than to stay put.

“They don’t want to give up their juicy…mortgage rates that a lot of them refinanced at,” says Brad Hunterpresident of the real estate consulting firm Hunter Housing Economists based in West Palm Beach, FL.

Those selling and watching their neighbors receive bargains for their properties might refuse to settle for lower prices. They could take their homes off the market if the bidding wars they dreamed of don’t materialize.

“Sellers attach themselves to a certain price that they think [their homes] are worth it,” says Hale. “It can take a while for sellers to understand that a buyer is unwilling to pay the asking price.”

Moreover, there will always be some who can still afford the high prices.

Millennials “start to move up in their careers, move up and make more money,” says Hunter. “Because they waited longer than previous generations to look for their first home, they have been working and saving ever since. [longer].”

Investors should also keep prices high and support selling. It is profitable to buy properties and rent them out because rents are high and are unlikely to slow down until more housing is built.

Moreover, a wave of seizures, which would deal a blow to high prices, is not expected. It is much harder to get a mortgage today than when the real estate crisis approached. Only the most qualified buyers, likely to repay their mortgage, are granted loans. And today’s job market is so strong that many homeowners struggling to make their mortgage payments may be able to find better-paying work.

“It’s only when you start to see a lot of foreclosure sales that you start to see big price drops,” says Zandi.

Could a looming recession send home prices plummeting?

A recession, which some fear is on the horizon, could further upset the market. The US Federal Reserve raises interest rates in an effort to control inflation, and the war in Ukraine causes some global instability. However, the nation still has a good chance of avoiding one altogether.

And the housing market should be able to handle it for the long haul, especially for most Americans who plan to spend the next few years in their homes. There is still a housing shortage and more interested buyers than sellers, unlike during the Great Recession.

“The risks of recession are high and growing. [But] there’s a good chance the economy will pull through, says Zandi. “Ultimately, the [housing] the market is still tight. I don’t expect to see big declines anywhere.

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