The Housing Market Turns Bearish

After a decade of robust housing activity in the form of greater home sales, rising prices and higher rents, it appears the housing market is finally starting to lose steam.

Higher inflation, rising mortgage rates and growing concerns over a possible recession are all putting the breaks on home sales, as illustrated by several recent reports.

While home prices and residential rents are still at record highs, it maybe just a matter of time before these two metrics start softening as well.

As less and less people qualify for loans with higher monthly mortgage payments, sellers will likely have to reduce their asking prices to accommodate the lower pool of buyers

Surging Mortgage Payments

The national median monthly payment for a borrower rose to $1,897 in May, up $514 in the last five months, according to the Mortgage Bankers Association (MBA). That marks an increase of 37.1% as the average 30-year mortgage rates nearly doubled from 5.81% for the week ending June 23, up from an average of 3.02% last year.

The rapid rise underscores the housing affordability issues dominating the market with many homebuyers, especially first-time ones, pushed out of the market. And there’s little hope for relief soon as mortgage rates this week edged even closer to 6%.

“The ongoing affordability hit of higher home prices and fast-rising mortgage rates led to a slowdown in purchase applications in May,” Edward Seiler, associate vice president and executive director at the MBA’s Research Institute for Housing America, said in a statement. “Inflationary pressures and rates above 5% are both headwinds for the housing market in the coming months.”

As rates have risen, home sales have declined. Sales of previously-owned homes fell 3.4% in May compared to a month earlier and dropped 8.6% from a year ago, according to the National Association of Realtors (NAR).

More Buyers are Walking Away from Accepted Offers and More Sellers are Reducing their Asking Prices

About 600,000 home purchase agreements, nearly15% of all homes that went under contract, were cancelled in June according to a new report from Redfin. That is the highest share since March and April 2020, when the housing market all but ground to a halt due to the onset of the coronavirus pandemic. It compares with 12.7% a month earlier and 11.2% a year earlier.

“The slowdown in housing-market competition is giving homebuyers room to negotiate, which is one reason more of them are backing out of deals,” said Redfin Deputy Chief Economist Taylor Marr. “Buyers are increasingly keeping rather than waiving inspection and appraisal contingencies. That gives them the flexibility to call the deal off if issues arise during the homebuying process.”

Marr continued: “Rising mortgage rates are also forcing some buyers to cancel home purchases. If rates were at 5% when you made an offer, but reached 5.8% by the time the deal was set to close, you may no longer be able to afford that home or you may no longer qualify for a loan.”

Meanwhile, another report also from Redfin indicates that 1 in 4 U.S. home sellers nationwide lowered their asking prices in June. “Home sellers are contending with a rapidly changing market, especially in places where they’re used to their neighbor’s homes getting multiple offers and selling for more than asking price,” said Redfin Senior Economist Sheharyar Bokhari.

Share of homes for sale with a price drop in June 202297 most populous U.S. metro areasSorted by share of for-sale listings with a price drop in June 2022
U.S. metro areaShare of homes for sale with a price drop in June 2022Share of homes for sale with a price drop in June 2021
Boise, ID 61.5%25.7%
Denver, CO 55.1%31.7%
Salt Lake City, UT 51.6%22.8%
Tacoma, WA 49.5%32.0%
Grand Rapids, MI 49.3%22.5%
Sacramento, CA 48.7%26.5%
Seattle, WA 46.3%25.8%
Portland, OR 45.7%27.9%
Tampa, FL 44.5%28.6%
Indianapolis, IN 44.1%32.5%
Phoenix, AZ 43.6%16.5%
San Diego, CA 43.3%21.0%
Stockton, CA 42.9%19.8%
Austin, TX 41.6%14.9%
Cape Coral, FL 41.2%21.5%
North Port, FL 41.1%25.6%
New Orleans, LA 40.7%25.6%
Jacksonville, FL 40.1%15.0%
Philadelphia, PA 38.7%30.3%
Anaheim, CA 38.7%12.6%
Oakland, CA 38.5%16.4%
San Jose, CA 38.2%17.3%
Houston, TX 38.0%25.2%
Las Vegas, NV 37.7%14.6%
San Antonio, TX 37.5%20.2%
Dallas, TX 37.4%16.4%
Colorado Springs, CO 37.0%18.7%
Lakeland, FL 36.8%19.1%
Fort Worth, TX 36.7%17.8%
Fresno, CA 36.4%40.3%
Washington, DC 36.2%22.9%
Riverside, CA 36.1%11.1%
Frederick, MD 36.0%22.3%
Richmond, VA 35.3%22.3%
Baltimore, MD 35.0%26.2%
Bakersfield, CA 35.0%20.0%
Orlando, FL 34.7%25.1%
Tulsa, OK 33.9%26.0%
Baton Rouge, LA 33.6%20.1%
Des Moines, IA 33.4%21.7%
Oklahoma City, OK 33.2%22.8%
Rochester, NY 33.1%21.6%
Warren, MI 33.0%27.3%
Minneapolis, MN 32.5%22.6%
Akron, OH 32.4%20.2%
Atlanta, GA 31.9%19.6%
Allentown, PA 31.2%19.0%
Montgomery County, PA 30.8%23.0%
Omaha, NE 30.7%23.4%
Buffalo, NY 30.3%23.1%
Wilmington, DE 30.2%20.3%
Virginia Beach, VA 29.8%17.0%
Los Angeles, CA 29.6%12.6%
Oxnard, CA 29.2%10.3%
Boston, MA 29.2%21.3%
Charlotte, NC 29.2%13.5%
St. Louis, MO 29.1%22.1%
Louisville, KY 28.7%21.4%
Detroit, MI 27.9%19.1%
Kansas City, MO 27.8%19.8%
Cleveland, OH 27.5%19.2%
Dayton, OH 27.3%21.1%
Tucson, AZ 27.1%10.8%
Nashville, TN 26.6%15.9%
West Palm Beach, FL 26.3%13.0%
Raleigh, NC 25.9%5.5%
Camden, NJ 25.7%18.1%
Charleston, SC 25.5%10.8%
New York, NY 25.5%21.5%
Albany, NY 25.2%21.3%
Worcester, MA 25.1%16.8%
Nassau County, NY 25.0%18.7%
San Francisco, CA 25.0%16.6%
Greensboro, NC 24.5%11.9%
Little Rock, AR 23.9%12.7%
Birmingham, AL 23.4%12.3%
Providence, RI 23.4%13.4%
Pittsburgh, PA 23.3%16.8%
Knoxville, TN 23.2%12.4%
Memphis, TN 23.0%10.4%
Greenville, SC 21.9%11.3%
Fort Lauderdale, FL 20.9%11.4%
Cincinnati, OH 19.9%14.1%
Bridgeport, CT 19.4%14.9%
Columbus, OH 19.1%14.5%
Hartford, CT 19.0%14.7%
Lake County, IL 19.0%25.1%
Miami, FL 18.8%9.7%
Chicago, IL 18.8%24.6%
Elgin, IL 18.5%24.7%
McAllen, TX 18.1%13.0%
New Haven, CT 17.9%13.1%
New Brunswick, NJ 17.8%14.5%
Milwaukee, WI 17.4%13.9%
Honolulu, HI 16.8%8.1%
Newark, NJ 14.1%13.3%
El Paso, TX 13.3%8.6%

(Source: Redfin)