U.S. housing market could continue to decline

The U.S. housing sector remains in the weak market category despite some attempts at improvement. The first part of the year saw a brief increase in mortgage applications. However, the charm was short-lived due to rising mortgage rates, which again caused buyers to pull back.

Thus, the enthusiasm that the market was reaching its bottom was quickly diluted. The negative sentiment was such that mortgage applications fell to 28-year lows during the week ending February 17. The cause of this plunge, as previously stated, is in the increase in rates across the board.

As a result, mortgage rates recently experienced a disproportionate increase that caused fear among potential buyers and investors. “Mortgage rates increased across all loan types last week,” said Joel Kan of the Mortgage Bankers Association as quoted in The Street. He added that these increases were behind the 18% drop in applications from the previous week.

At what point does the housing market lose momentum?

The fact that the real estate market is losing momentum at this stage of the year is more than striking. It is usually at this time that purchases are booming and investment capital is flowing into real estate companies. However, this is not the case as investors are still digesting the recent news about the Federal Reserve’s monetary policies.

Inflation in the U.S. economy had been receding sharply until December, when it fell to 6.5% year-on-year. But January added a dash of drama to the story and prices declined at a slower pace than expected. Financial markets reacted in mixed fashion to this development. Meanwhile, mortgage rates responded to the upside.

The result is commented on by Kan in the following words:

“The increase in mortgage rates has once again sidelined many homebuyers. Especially first-time homebuyers who are more sensitive to affordability challenges and the impact of higher rates.”

Thus, the positive increase earlier in the year was undone by the Labor Department’s CPI report. It should not be lost sight of that the housing market is highly sensitive to macroeconomic movements. The fact that inflation remains on a slower than expected decline means that the Central Bank must be more aggressive. The result of them cannot be other than a decline in the markets.

The rate increases cover all types of loans

As highlighted by the aforementioned expert, the increase in mortgage rates covers all types of existing loans in the sector. Such is the case of the 30-year mortgage rate, which averaged 6.5% during the week ending February 23. This is the largest increase since November of last year, says Freddie Mac. It is also up from 6.32% the week before.

“The economy continues to show strength and interest rates are being repriced to account for stronger-than-expected growth, the tight labor market and the threat of stiff inflation,” notes Freddie Mac’s Sam Khater.

During the last leg of 2022, through November, the interest rate experienced four 75 basis point hikes in a row. The latter, coupled with earlier increases since March, brought inflation down from its highest peak reached in June. This progress allowed important sectors to dream of a soft landing, that is, a victory over inflation without causing a recession.

Thus, during the month of December, the rate was increased by 50 basis points. The next meeting of the Federal Open Market Committee (FOMC) in February agreed to an increase of 25 basis points. This sense of control of the situation by the Federal Reserve boosted the housing market. However, as noted above, the enthusiasm was short-lived.

Unrepeatable opportunity for homebuyers

But the housing slump is not negative for everyone. For example, for buyers it becomes a great opportunity to acquire properties at low costs. The reason for this is that mortgage rates tend to vary among lenders as interest rates rise.

This is supported by Freddie Mac’s research. It specifies:

“This means that homebuyers can potentially save between $600 and $1,200 a year if they take the time to shop around among lenders to find a better rate.”

On the other hand, it highlights the fact that inventories remain considerably high. In the case of pre-owned homes, a -0.7% drop in demand was experienced since December. According to data from the National Association of Realtors, this is the twelfth consecutive monthly decline in this particular area. On a year-over-year basis, sales fell 36.9%.

But these are not the only figures that speak of the precarious situation of the real estate market. Also noteworthy is the -2% drop in the average price of homes during January. That plunge came to $359,000 from $366,900 in December. For a more accurate measure of this drop, it should be noted that in June the average price was $413,800, which was a peak.

This can become a golden opportunity for homebuyers, especially first-time buyers. In that sense, it is up to them to find the best mortgage rates. In short, it can be said that falling home prices do not translate into market strength. However, what cannot be denied is that it is a great relief for those looking to buy.

Inventories at capacity

Inventories remain at high levels, which is also good for buyers. By the end of January, inventory totaled 980,000 units on hand. This equates to 2.1% growth from December and 15.3% year-over-year. In other words, buyers are disinterested and sales are stagnant.

At the same time, it should be noted that the inventory of unsold homes has a supply of 2.9 months. The latter, it is worth noting, is calculated taking into account the current pace of sales.

Although the inventory is very high, its level is not alarming for the health of the real estate market. Moreover, the level it is at allows buyers to have greater bargaining power when it comes to purchasing homes. “Homes that remain on the market for more than 60 days can be purchased for about 10% less than the original list price,” Lawrence Yun, chief economist at NAR, told NAR.

Thus, the situation in this market suggests that the problems could continue into 2023. A more aggressive Federal Reserve in increasing the price of money will continue to affect the purchasing power of citizens. In the midst of this situation, budgets will be prioritized for basic needs and not for investments in homes or cars.

If inflation continues in its current stubborn state of retreat, it can be taken for granted that a recessionary situation will reach the economy in a short period of time. If that happens, the real estate market will go to an even deeper bottom and prices could plummet from the current point.