Higher mortgage rates are throwing a bucket of ice water into the overheated real estate market. Home prices in August were down about 6% from their peak in June, the biggest two-month price drop in nearly a decade. The pace of home sales slowed for the 7th consecutive month.
“The housing market is certainly reacting to the change in monetary policy,” said Lawrence Yun, chief economist for the National Association of Realtors, which just released the new existing home sales numbers.
The Federal Reserve raised interest rates to fight inflation. Mortgage rates more broadly anticipate future movements in the federal and bond markets, so they rose very sharply earlier this year – from around 3% to over 6%.
“This magnitude of mortgage rate increase is one of the largest and fastest increases in such a short time,” Yun said. He says the number of home sales each month is now down about 20% from a year ago.
Don’t call it a real estate crash
This does not mean that we are in a real estate crash. Almost all economists agree that this is different from what it was in 2008, when the housing market bottomed out.
Right now, the nation is in the midst of a severe housing shortage. For a decade after the 2008 crash, builders didn’t build enough homes. Today, homes are still being bought by buyers and put up for sale in near record time – just 16 days on average.
Nationwide house prices are still up about 8% from a year ago according to the Realtor’s Group. Weak supply and strong demand should continue to support prices.
Also, Congress changed mortgage rules after the housing bubble when subprime lenders gave millions of Americans loans they couldn’t afford. Today, homebuyers must demonstrate that they can pay their loans.
Home prices will likely continue to fall
Home prices will likely continue to fall. That’s because rock-bottom interest rates combined with superheated demand during the pandemic have driven prices up so dramatically so quickly – up about 30-40% in the last 2 years only.
Mark Zandy of Moody’s Analytics predicts that home prices across the country will fall about 10% from their peak. Regions that have seen the most dramatic price increases could see even bigger declines, he says.
“The previously strongest markets, such as Phoenix or Orlando, will experience declines closer to 20%,” Zandi estimates.
That’s if the country doesn’t fall into a recession. Economists say it is entirely possible that in its fight against inflation, the Federal Reserve will slow the economy so much that it will tip the country into recession.
“If the economy suffers a recession,” says Zandi, “national house prices will fall by up to 15% from peak to trough, and almost 30% in the hardest hit markets.”