- Housing prices are high, supply is tight and rates are surging.
- The housing market is scaring off both buyers and sellers.
- “A lot of people just want to sit tight and see what happens,” said one real estate agent.
Today’s housing market is facing a daunting combination of soaring mortgage rates, exorbitant prices, limited supply, and an unusual level of pent-up demand. This volatile mix is causing distress among both buyers and sellers.
The surge in prices was already noticeable due to heightened demand during the height of the Covid-19 pandemic. Now, with a 30-year fixed mortgage rate of 8% – the highest in decades – the situation has become even more challenging. Mortgage demand has plummeted to its lowest point in nearly 30 years.
“I think it’s painful. I think it’s ugly,” said Matthew Graham, chief operating officer at Mortgage News Daily, during an interview on CNBC’s “The Exchange” on Thursday.
In the first two years of the Covid-19 pandemic, the Federal Reserve set its benchmark rate to zero and injected money into mortgage-backed securities, resulting in record-low mortgage rates. This led to a buying frenzy, fueled by an urban exodus and the rise of remote work. As a result, home prices surged by 40% compared to pre-pandemic levels.
Ironically, when inflation started to surge, the Fed raised rates, making the housing market even more expensive. Typically, when rates increase, home prices decrease. However, this market differs from previous ones as it also suffers from a severe shortage of supply. The Great Recession of 2008 and the subsequent foreclosure crisis had a lasting impact on homebuilders, causing them to underbuild for over ten years, and they still haven’t caught up.
On the other hand, potential sellers find themselves trapped. They have little incentive to trade their current 3% mortgage rate for an 8% rate on a new purchase.
“I don’t think anybody in my community of mortgage originators would disagree that, in many ways, this is worse than the great financial crisis in terms of volume and activity,” added Matthew Graham.
Furthermore, it is uncertain when the market can expect a decline in rates. “But we do hear a chorus of Fed speakers, especially last week, in a very notable way, saying that they are restrictive and that they can wait and see what happens with the policy filtering through to the economy,” Graham explained.
According to the National Association of Realtors, sales of previously owned homes in September dropped to the slowest pace since October 2010. However, there are significant differences between the current market and the era of the foreclosure crisis. Foreclosures are now extremely low, and most homeowners have high levels of home equity. Additionally, many homeowners refinanced at record-low interest rates between 2020 and 2022, resulting in affordable housing costs.
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