The U.S. housing sector is losing steam amid rising interest rates, which are spooking some would-be home buyers, according to various reports.
The housing sector’s been red-hot for months amid the two-plus years of the COVID-19 pandemic, with soaring prices leading some economists to express their concern about overvalued markets.
On Wednesday, the U.S. Federal Reserve raised the benchmark interest rate by 75 basis points to a 1.5% to 1.75% range, the biggest increase since 1994 as it tries to tame rising inflation from a 40-year high.
But with rates rising, the market is finally cooling off, and some buyers say they are pushing off plans to purchase a home by as much as 6 to 12 months.
In fact, about half of buyers were hitting the pause button on their plans to buy a home, choosing to wait for six to 12 months before restarting the process, according to a recent survey of 900 realtors by real estate tech startup HomeLight.
Around 35% of real-estate agents — who have been generally bullish on the housing market during the pandemic — reported that they saw buyers dropping out of the market completely amid the higher rates.
Meanwhile, mortgage applications have fallen to the lowest level in 22 years, according to recent data from the Mortgage Bankers’ Association. Refinancing and purchases are considerably down.
“‘Does this mean that we’re gonna see a collapse the way we saw 15 years or so ago? I would probably say no, in part because incomes are strong, and there’s still a shortage of inventory.’”
— Michael Neal, a principal research associate at the Urban Institute
“All of this points to a broader weakness in the housing market,” Michael Neal, a principal research associate in the Housing Finance Policy Center at the Urban Institute, a Washington, D.C.-based think tank, said.
“Does this mean that we’re gonna see a collapse the way we saw 15 years or so ago?” he added. “I would probably say no, in part because incomes are strong, and there’s still a shortage of inventory.”
The National Association of Realtors reported that existing home sales fell in April for the third consecutive month, by 2.4%.
New single-family home sales fell by 16.6% in April from the previous month, according to the U.S. Department of Housing and Urban Development.
Both these data points show that “we’re seeing declines in sales on both sides of the market, which I think is attributable to higher interest rates, as well as higher prices,” Neal said.
“Another not insignificant challenge on the horizon: Concerns about financial stability are also rising: 16% of consumers surveyed said they expected to lose their job in the next 12 months.”
Home prices have correspondingly started to rebalance.
CoreLogic expects annual home-price appreciation to slow to 5.6% by April 2023, it reported on June 7.Compare that to the 21% annual increase in housing prices in April 2022.
But potential home buyers are feeling pain with mortgage rates rising so briskly, despite a cooling market. Some 79% of potential home buyers surveyed by Fannie Mae said that they feel like it’s a bad time to buy a home, while 70% expect rates to move up over the next year.
Another not insignificant challenge on the horizon: Concerns about financial stability are also rising: 16% of consumers surveyed said they expected to lose their job in the next 12 months.
The Fannie Mae survey also noted that slightly more respondents expect home prices to go up in the next year.
Write to MarketWatch reporter Aarthi Swaminathan at firstname.lastname@example.org.
SEE ALSO: Mortgage rates rise in latest week, as demand for housing cools: Freddie Mac