Highest Mortgage Rates Since 2008 Housing Crisis Cool Sales

For the past two years, anyone with a home to sell could get virtually any asking price. Good or bad, in cities and suburbs, seemingly everything in the market had a line of eager shoppers.

Now, in the space of a few weeks, realtors have gone from managing bidding wars to seeing properties without offers, and once-popular markets like Austin, Texas and Boise, Idaho are poised for big drops.

The culprit is rising mortgage rates, which have spiked to their highest levels since the 2008 housing crisis in response to recent efforts by the Federal Reserve to rein in inflation. The jump in borrowing costs, which adds hundreds of dollars a month to the typical mortgage payment and comes on top of two years of rising home prices, has pushed eager homebuyers over the edge. financial.

“We’ve gotten to the point where people just can’t afford a house,” said Glenn Kelman, CEO of Redfin, a national real estate agency.

More than any other part of the economy, housing, a purchase that for most buyers requires taking on large amounts of debt, is especially sensitive to interest rates. That sensitivity becomes even more pronounced when housing is not affordable, as it is now. As a result, home prices and new construction are a central component of the Federal Reserve’s efforts to curb rapid inflation by raising interest rates, which the central bank has done several times this year. But the Fed’s actions carry an inherent risk that the economy could spiral into recession if they stifle too much home buying and development activity.

While housing doesn’t account for a large amount of economic output, it is a boom-and-bust industry that has historically played a huge role in recessions. The sector runs on credit, and new home purchases are often followed by new furniture, new appliances and new electronics that are major pieces of consumer spending.

“We need the housing market to buckle to control inflation, but we don’t want it to crash, because that would mean a recession,” said Mark Zandi, chief economist at Moody’s Analytics.

Home prices are still at record levels, and it will likely take months or longer for them to fall, if ever. But that warning, often used as a shield by real estate agents, cannot hide the fact that demand has dropped considerably and the direction of the market has changed.

Existing home sales fell 3.4 percent in May from April, according to the National Association of Realtors, and construction has also slowed. Homebuilders who had been sifting through their inventory with elaborate lotteries now say their pandemic lists have shrunk to the point that they are lowering prices and sugarcoating incentives, like cheaper counter and bathroom upgrades, so that shoppers get over the line.

“There was this collective belief that housing was invincible, that it was so out of supply and demand was so high that nothing could stop price growth,” said Ali Wolf, chief economist at Zonda, a housing data and consulting firm. . “A very rapid rise in interest rates and home prices has proven that theory to be false.”

It’s a sea change for a market that boomed shortly after the initial impact of the pandemic, which for many people turned out to be the perfect time to buy a home. Lower mortgage rates lowered borrowing costs, while the shift to home offices and Zoom meetings opened up new swaths of the country to buyers who had been struggling to break into the market near the jobs they needed. who once travelled.

That sent prices soaring in remote suburbs and once-affordable places like Spokane, Washington, where throngs of new-home buyers have fled from pricey West Coast cities. People became so willing to move long distances to buy a home that “the normal laws of supply and demand didn’t apply,” Kelman said.

However, after two years of rapid price increases, places that once seemed cheap are no longer cheap. Home values ​​have risen about 40 percent in the last two years, according to Zillow, forcing buyers to further stretch the price even as they run out of geography.

Now add mortgage rates, which have nearly doubled this year. And inflation, which is eating into some families’ savings as household spending rises. And a faltering stock market, which has driven down the value of portfolios that many buyers intended to tap into for a down payment.

Larisa Kiryukhin and her family were long ago expelled from the San Francisco Bay Area, where they had lived for decades. Ms. Kiryukhin, 44, is a medical assistant who was attached to her hospital, but the pandemic gave her husband, who works in information technology, the flexibility to move to a more affordable city. . So Ms. Kiryukhin changed jobs, and this year the couple and their two children moved to Tampa, Florida, hoping to buy a house.

In April, the family signed a contract for a $425,000 house and was quoted an interest rate of 4 percent. Then the closing date was extended because the seller wanted time to find a new home. Then interest rates increased, adding about $700 to the monthly payment, and the family backed out.

“I moved here just to buy a house, and here we go: prices have gone up so much that we can’t afford it,” Ms. Kiryukhin.

The typical home buyer earns about $70,000 a year, according to Moody’s Analytics. A $600 per month increase in housing costs, roughly how much interest rates have been added to the typical mortgage payment, is more than most people can afford.

Steve Silbar, a real estate agent in Spokane, Washington, said he had seen a sharp decline in interest among buyers looking for homes under $500,000. Those buyers often have less cash, so rising mortgage rates “have put them out of business,” he said.

Heather Renz and her husband, clients of Mr. Silbar, were preparing to purchase a home for $360,000. Mrs. Renz is her mother’s caregiver. To qualify for a mortgage, her husband, who works as a technician at an aerospace company, was going to take money out of his retirement account and increase the down payment. But recent stock market crashes pushed the amount he could withdraw below what they needed to qualify.

“We were three-quarters of the way through the process,” Ms. Renz said.

The interest rate on a 30-year fixed-rate mortgage rose to 5.81 percent from 3.22 percent in the first week of January, according to mortgage giant Freddie Mac. Part of that adjustment anticipated future rate hikes. rate from the Fed. Officials raised rates by three-quarters of a percentage point in June alone, the biggest increase since 1994, and have signaled a similar move is on the table in July. Any other surprises could send mortgage rates higher still.

Inflation is advancing at the fastest rate in 40 years, forcing the Fed to adopt an aggressive policy response to try to control it.

Because higher interest rates slow large purchases made on credit, from houses and cars to business equipment, they can limit demand and allow supply to catch up, moderating price increases across the economy.

Joanna Smialek contributed report.

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