Housing Market Momentum Stalls as Critical Spring Season Approaches; Rising interest rates squeeze affordability, drive mortgage applications to lowest levels in decades

A continued slowdown in housing sales this spring could ripple through real estate-related industries, including sales of furniture and appliances.

Rising mortgage ratesare cooling the U.S. housing market, sapping recent buyer interest heading into the crucial spring selling season.

Economists, home builders and real-estate agents sawevidence of a thaw in early 2023, when rates declined from over 7% in November to 6.09% in early February. That was enough to lure back some buyers who had adjusted to higher borrowing costs.

Home builders and sellers enticed buyers with concessions such as temporary rate buydowns to make purchasing more affordable. Prices had alsoslid from their springtime highs in most markets.

But stronger-than-expected economic data in recent weeks has strengthened expectations that the Federal Reserve will stick to its path of raising short-term interest rates in an effort to cool inflation, which could keep borrowing costs higher for longer.
Mortgage rates have moved higher for four straight weeks to 6.65% as of March 2, their highest level since early November, according to Freddie Mac. Mortgage applications from home buyers, meanwhile, slid during the week ended Feb. 24 to the lowest level in 28 years on a seasonally adjusted basis, according to the Mortgage Bankers Association.

Higher borrowing costs are again squeezing affordability. A mortgage rate increase from 6.4% to 7.4% would have the same effect on affordability as a 10% increase in home prices, according to an analysis by First American Financial Corp.

“Buyers are starting to step back,” said Glenn Kelman, chief executive of real-estate brokerage Redfin Corp. “I have never seen home buyers more rate sensitive in my 17 years of running this company.”

The spring is typically the most important season for the housing market, with about 40% of existing-home sales for the year typically occurring from March through June, according to the National Association of Realtors. These months are especially active in part because families with children want to move into new homes before the start of the school year.

If mortgage rates retreat toward 6% again, that might be enough to attract some buyers back to the housing market, especially if the economy doesn’t enter a recession.

But a continued slowdown in sales this spring could ripple through real estate-related industries. It would likely weigh on spending for items such as furniture and appliances. It could also reduce revenues for real-estate brokerages, mortgage lenders and other related businesses.

“The housing market had this false hope that was being borne with rates going back to 6%,” said Doug Duncan, chief economist at Fannie Mae. “We were a little surprised that there was as much of a pickup as there was, but now we think it will be given back.”

Home-sales activity ground to a halt in late 2022, as mortgage rates hit the highest level in two decades in October and November. Buyers werepriced out or nervous about buying at the peak of the market. Homeowners who had locked in low mortgage rates in 2020 and 2021 wereunwilling to list their homes for sale. The number of existing-home sales plunged 36.9% from January 2022 to January 2023.

The scarcity of new listings was a big reason for the housing slump last year, and many prospective home sellers are still staying put. The total inventory of homes for sale is up from a year ago because homes are sitting on the market longer, but new listings in the four weeks ended Feb. 26 fell 20.3% from a year earlier, according to Redfin.

The lower-than-normal inventory is continuing to spark bidding wars for desirable homes, real-estate agents say. But buyers are less willing to offer big premiums above the listing price or other concessions like they were during the frenzied spring markets of 2021 and 2022.

“The people that are buying now are much more cautious and are paying more attention than the people that were buying last year,” said Brianna Morant, a real-estate agent in Nashville, Tenn.

Mellissa and Bruno Fernandes of Charlotte, N.C., plan to sell their home and buy a new one this spring. They want to move to a different neighborhood in the Charlotte area before their 4-year-old enters kindergarten, and Mrs. Fernandes wants to be closer to her job.

They plan to list their home for sale for about $690,000, which would be more than 60% above what they paid for it in 2015. They started house hunting last year but were turned off by the dearth of homes to choose from and the highly competitive market. They are hopeful this spring will bring more opportunity.

“Now it feels like the market’s just opening up,” Mrs. Fernandes said.

While high interest rates are likely to frighten off some potential sellers who locked in low rates, real-estate agents still expect inventory to rise this spring. Some homeowners have to move because of changing life circumstances, such as job relocations or divorces. And even with prices falling in some markets, many people can still sell their homes for well above what they initially paid and put the profits toward a new purchase.

Chase Youngman and Jessica Laury had an offer accepted in February for a two-bedroom condo in a suburb of Atlanta. But because there is a tenant living in the unit, they won’t close on the purchase until June, and they haven’t yet locked in an interest rate.

“It feels more likely than not that rates will continue to rise,” said Mr. Youngman, who is 25.

They expect to follow through with the purchase even if rates increase, he said, because their monthly payments would be similar if they rented instead, and they want to start building equity. The couple plans to use an adjustable-rate mortgage that carries a lower interest rate in the first five years of the loan.

“We definitively plan on refinancing as soon as we can,” Mr. Youngman said.

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abstract courtesy WSJ 3/6/23

 

Peter Gelsey
Wailea Makena Real Estate, Inc.
www.petergelsey.com
direct (808) 344-8000
email peter@petergelsey.com
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