After two years of skyrocketing house prices thanks to a severe housing shortage and low interest rates that are boosting housing demand, hope may be dawning on the horizon for the millions of Americans facing to high housing costs. February 2022 showed several signs that the market might start to cool down.
While a number of factors could continue to push prices higher, these three charts show why we may be at a turning point in today’s hot housing market.
1. Existing home sales are down
According to the National Association of Realtors (NAR), in February 2022 there were 7.2% fewer existing home sales in February than in January 2022. This is the seventh consecutive decline in existing home sales in February. one year to the next.
The slight drop in the number of homes sold helped push existing home inventory up to 1.9 months of supply, although that figure remains well below the target range of five to six months of inventory. The sales trend has been a bit of a roller coaster, moving up and down over the past year, but rising property costs coupled with inflation and the current rise in mortgage rates could mean that the lack of sales activity is here to stay.
2. New home sales are down
The housing shortage has been attributed as one of the main drivers of today’s scorching housing market. Years of underbuilding after the Great Recession created a shortage of housing available today. New homebuilders have been furiously trying to close the gap between demand and supply, accelerating housing starts and completions since 2020. But February could be the first sign that supply could outpace demand.
According to the US Census Bureau and the Department of Housing and Urban Development (HUD), new home sales were down 2% in February 2022 from January 2022 levels and 6.2% from February 2021. There is approximately 6.3 months of new home supply, putting it in a balanced supply market.
Despite the national shortage, it seems people are buying fewer new homes. This could be because affordability is becoming a growing concern as house prices continue to rise and interest rates also rise. If this downward trend in demand for new home sales continues, it could push inventory into oversupply.
3. Interest rates are rising
The Federal Reserve (the Fed) issued its first increase in the federal funds rate in more than four years. This movement, although modest, is the first of a long series since the Fed goes from 0% to 1.9% by the end of the year.
Although the federal funds rate does not set mortgage rates, it does impact the cost of capital and complicated movements in financial markets, meaning lenders like banks and other non-mortgage lenders are susceptible to raise mortgage rates, pushing some of that cost burden higher. on consumers.
Interest rates are trending higher, sitting at 4.67% today for a 30-year mortgage, up 1% from just a month ago. With the upcoming rate hikes by the Fed, it is very likely that mortgage rates will continue to climb, making homes even less affordable.
To illustrate how big a 1% jump can be, a 30-year mortgage at 3.76% on a $281,000 home, the national median house price today, assuming a 20 %, would equal a monthly mortgage payment of $1,042. At the current interest rate of 4.76%, that same home purchase would result in a monthly mortgage payment of $1,174. That’s $1,584 more every year.
Coupled with inflation, rising food prices, skyrocketing gas prices, rising property taxes and property insurance, and sky-high real estate prices, more and more Americans are being squeezed out of the market because of affordability. This will ultimately lead to lower demand and likely slower house price growth as demand more closely matches supply.
Housing prices are determined by supply and demand. As you can see in these three charts, there are many signs pointing to a balance or potential correction between today’s tight supply and record high demand. We could see things start to stabilize in the coming months, although there is no guarantee that this trend will continue.