June 26, 2023

Rising rates holding many out of housing market

After two long years of fierce competition, sky-high costs, and intense bidding wars, the housing craze screeched to a sudden halt in the spring of 2022.

With inflation on the rise and the Federal Reserve hiking its baseline interest rates, mortgage rates doubled in a matter of months.

Today, there is no shortage of prospective buyers, but many balk at the high prices that come with a dwindling supply. The national median list price grew to $441,000 in May up from $430,000 in April. That’s the third monthly increase in a row, and higher than the median price of $428,300 in May of 2022.

Coupled with the rising interest rates, the monthly payment for principal and interest on a median priced home is nearly 24% higher compared to a year ago.

That is leaving current homeowners - most of whom secured mortgages at record-low rates – with little to no motivation to put their properties up for sale. Consequently, the pool of viable for-sale options remains slim.

Economic uncertainty – including inflation, the threat of financial instability, and the war in Ukraine – adds to the unnerving prospect of buying or selling property. The result? A tense housing market stalemate.

Renting is an option, but not a very appealing one. The median rent nationwide is $1,350, much higher in metropolitan markets. And renters are not building any equity.

But a home purchase isn’t just a financial decision. It’s an emotional one. Throughout history, singles become couples, who then form families and eventually establish households. They can only put off these decisions for so long. Eventually, they grow accustomed to the idea of spending more on a home.

Some sectors of the market are seeing measurable growth. Construction on new homes jumped 21.7% in May, as homebuilders ramped up building single-family homes to meet strong demand from buyers. The rate of building reached 1.63 million per year, up from 1.34 million in April. Both single and multi-family construction rose.

Prices of new homes are coming into alignment with existing homes. The median sales price of new single-family homes in April was $420,800. The median new home sales price in April of 2022 was $458,200.

The National Association of Realtors (NAR) anticipates existing-home sales will decrease by 11.1% in 2023, and existing-home prices will drop nationally by 1.6%. As inflation rates decrease, mortgage rates are likely to follow. Lower rates will likely lead to increased housing demand, adding more potential affordability challenges, according to the Mortgage Bankers Association (MBA).