Housing market softens as stock, interest rates change dynamically

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After a stunning rise in property prices enriched seller and keyed up buyers in Frantic bidding wars are showing signs that the US housing market is beginning to cool amid a flurry of new inventory and higher interest rates.

“For Sale” signs are proliferating in formerly red hot markets like San Jose, Chicago and Phoenix. Have the volume of monthly home sales in the US has posted double-digit declines over the past year, according to estimates by Zillow and the National Association of Realtors. In May alone, the number of homes sold fell 19 percent from the same period last year, according to Zillow, and preliminary data suggests the decline was more pronounced in June.

“This year’s buyers are just a lot smarter, and they deserve it because they’re going to pay more to buy the home,” said Daniel Valdez, a realtor at eXp Realty in Sacramento.

The slowdown has brought little relief to shoppers so far. Instead, analysts say, a growing affordability crisis — fueled by the clash of inflation and rising interest rates — is forcing many potential buyers to walk away.

That’s because some sellers pay attention to it The stratospheric gains of 2020 and 2021, which lifted the average home price by more than 40 percent, are reluctant to lower their expectations. And home values ​​are still rising, averaging 19 percent in the year ending June, according to mortgage data company Black Knight.

“The market is cooling, but that cooling has come at the back of buyers who have been discouraged as buyers have been pushed out of the market,” said Jeff Tucker, senior economist at Zillow. “People who thought they were going to join the party are being greeted with absolute carnage in terms of affordability right now.”

The cooling housing market reflects broader shifts in the economy as policymakers work to hit a decade high Inflation under control.

The rock-bottom interest rates in 2020 and 2021 helped fuel the Home prices have risen since the coronavirus pandemic began in 2020. But the Federal Reserve reversed course this year after a spike in inflation, making the price of food, fuel, housing and other essentials a dominant economic concern. The central bank has raised interest rates three times in 2022 and has signaled four more hikes are pending. The latest hike in June was three-quarters of a percentage point, the Fed’s largest since 1994.

Higher interest rates mean higher borrowing costs: The average interest rate on a 30-year fixed rate mortgage was 5.3 percent on Thursday, up from 2.9 percent a year ago, according to Freddie Mac. It also coincides with a battered stock market and higher costs for almost everything, making it harder to save for a down payment.

Calculate how much more mortgages will cost if interest rates rise

The resulting “affordability bottleneck” is keeping many potential buyers away and resulting in fewer deals, analysts say.

“It’s a really scary time to be a home buyer for the first time,” said Nicholas Gerli, founder and CEO of Reventure Consulting.

Ali Wolf, chief economist at Zonda Home, says signs of the slowdown are everywhere: There is significantly more inventory Residences sit in some places longer on the market, and many sellers are cutting their asking price to generate interest, she said.

“What we’re seeing today is that buyers actually have a limit,” Wolf said. “Potential homebuyers are at a point where they are either intentionally exiting the housing market while waiting to see what happens next, or are being pushed out of the housing market in the face of the higher cost of home ownership.”

The housing stock, which refers to the number of active listings, has swollen in some of the country’s most expensive metropolitan areas, according to Redfin data. It’s up 47 percent in Denver, 42 percent in Oakland, California, and 40 percent in San Jose.

Some markets that have been changing during the pandemic have also hit the brakes, says Eric Finnigan, a director at John Burns Real Estate Consulting.

Boise, which has become a pandemic haven because of its cheap real estate and proximity to the Rocky Mountains, seems to have found its upper limit, Finnigan said. Property values ​​there exploded by 57 percent in 2020 and 2021 as people poured in Idaho’s largest city. But prices are up just 3 percent in the year that ended in May, marking a turnaround that Finnigan called “staggering.”

Many of the first-time home buyers since 2020 ended up paying more than they thought it was worth or turned to family members for help.

After renting for almost a decade, Myles Hughes, 32, wanted an apartment of his own. He got married late last year and moved from Florida to Albuquerque for a change of scenery.

Hughes, a construction manager at a space rental company and an actor and independent filmmaker, said he was outmaneuvered at every turn by other home seekers.

He visited dozens of properties over the course of four to five months, he said, but many of his serious competitors were swept out of the market within days. He lost six properties, he said, despite bidding quickly and increasingly above the asking price. As the search dragged on for months, interest rates continued to rise, as did asking prices, highlighting how often it takes time for sellers to adjust to the new economic conditions and tight budgets imposed by the Fed on buyers.

It was Offer #7 that landed Hughes his new home. but it needed help from its father, who raised the money for a cash offer. “We could only afford to fight so much in the bidding wars,” he said.

The lack of affordable options has frustrated buyers and sellers alike, analysts say.

The age-old “30 percent rule,” a financial planning maxim that says a person shouldn’t pay more than As a result, 30 percent of their income in real estate flows around. Black Knight reports that the typical payment-to-income ratio, based on today’s higher interest rates and still-high prices, has risen from 24 percent to 36 percent since January. This measure has left housing at its least affordable point since the early 1980s.

Brian Brackeen, who runs Cincinnati-based venture capital firm Lightship Capital, has witnessed the changing dynamics of the housing market firsthand. He bought his own home Then in April late last year, he bought his daughter a starter home in Tulsa.

For his daughter’s house, the rate was much higher and down payment considerations more difficult, he said. He also noted a shift in seller attitudes, with many stubbornly holding on to high asking prices even as the market shifts in their favor.

“When you’re a seller and you’re that close to the gold rush, you don’t want to give up that money when your friends sold for the top dollar with multiple bids on day one,” he said.

Brackeen also sees the pool of potential buyers changing.

“The world the current sellers are dealing with is more like their normal local market, not the former Covid-powered supermarket where people come from all over the country to each other’s markets and the number of shoppers in any given location bloat.”

In the end, Brackeen’s daughter’s home was valued below the purchase price, forcing both parties to give up several thousand dollars, he said. “The frothiness of the market isn’t what it used to be.”

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