Inflection Point: Is the Hot Housing Market About to Cool Down?

Years of historically low interest rates, economic growth and government stimulus policies have contributed to an epic recovery in real estate values since seeming to have bottomed out during the financial crisis of 2008

However, several recent reports appear to indicate that rising inflation, higher mortgage rates and a greater mobility of workers due to the emerging Work from Home (WFH) trend, are finally starting to take a toll on the red hot housing market. While inventory of homes for sale remain low and prices remain stubbornly high, recent drops in transactional activity point to a possible price concessions in the near future.

U.S. Home Sales Drop 7 Percent in February

The National Association of Realtors (NAR) said on Friday its Pending Home Sales Index, based on signed contracts, fell 4.1% last month to 104.9, the lowest level since May 2020. It was the fourth straight monthly decline in the index, which leads sales by a month or two.

Pending home sales declined in the South, Midwest and West, but rose in the Northeast. Economists polled by Reuters had forecast contracts rebounding 1.0%. Pending home sales decreased 5.4% in February on a year-on-year basis.

“It is still an extremely competitive market, but fast-changing conditions regarding affordability are ahead,” said Lawrence Yun, NAR’s chief economist. “Consequently, home sellers cannot simply bump up prices in the upcoming months, but need to assess the changing market conditions to attract buyers.”

As of February 2022, higher mortgage rates and sustained price appreciation has led to a year-over-year increase of 28% in mortgage payments.

“The surge in home prices combined with rising mortgage rates can easily translate to another $200 to $300 in mortgage payments per month, which is a major strain for many families already on tight budgets.”

Mortgage Rates Reach Highest Levels Since 2018

The average rate for a 30-year fixed-rate home loan jumped to 4.67%, mortgage-finance giant Freddie Mac said Thursday, marking the weekly figure‚Äôs highest reading since December 2018. At the beginning of the year, the average rate on the 30-year home loan was 3.22%. It was 4.42 percent last week. Over time, higher mortgage rates typically slow home-buying activity.

Higher Costs are Lowering Builder Confidence

The National Association of Home Builders reported this month that supply constraints on lumber and building materials, rising construction costs and higher interest rates continue to negatively affect builder sentiment.

Builder confidence in the market for newly built single-family homes moved two points lower to 79 in March 2022 from a downwardly revised reading in February, according to the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI). This is the fourth straight month that builder sentiment has declined and the first time that the HMI has dipped below the 80-point mark since last September.

“While builders continue to report solid buyer traffic numbers, helped by historically low existing home inventory and a persistent housing deficit, increasing development and construction costs have taken a toll on builder confidence,” said NAHB Chairman Jerry Konter, a builder and developer from Savannah, Ga. “We call upon policymakers to act now to ease supply-chain woes. “Improving access to lumber, OSB and other materials will help builders increase the supply of badly-needed housing and fight inflation.”

“The March HMI recorded the lowest future sales expectations in the survey since June 2020, said NAHB Chief Economist Robert Dietz. “Builders are reporting growing concerns that increasing construction costs (up 20% over the last 12 months) and expected higher interest rates connected to tightening monetary policy will price prospective home buyers out of the market. While low existing inventory and favorable demographics are supporting demand, the impact of elevated inflation and expected higher interest rates suggests caution for the second half of 2022.”