Housing market is a strange place for nearly a year. Now it seems like they are about to flip that bizarreness upside-down.
Sales of existing homes, the largest part of the market, have been declining for eleven months, largely as a result of the Federal Reserve’s tighter monetary policy pushing up mortgage rates. However, the prices of homes has continued to rise.
Home affordability has been impacted by higher mortgage rates, higher prices and a lower sales volume. There are many homeowners that might hesitate to sell their homes because the rate of their mortgage on the next property will be higher than they currently pay. Because the interest rate has risen, some homeowners might have to pay a larger monthly mortgage payment even if they own a much more expensive home.
According to data released by the National Association of Realtors on Friday, we could be at the tipping point when this happens. Prices will fall and sales are expected to rise.
The National Association of Realtors data showed that December sales dropped by 34% in comparison to one year prior. The slowest year in a nearly ten-year for home sales. Sales were 1.5 percent lower than a month ago. They were both smaller than we expected, and reflect a slower rate of decline. Monthly sales fell at 15.6 per cent, which is about half the decline from December to December. Sales for the full year were 17.8 per cent lower than in previous years.
At the December end, 970,000 houses were on sale. This was 13.4 percentage less than in November. However, inventory has increased 10.2 percent compared to December last year. Inventory levels have been decreasing in recent months.
Financial conditions have eased in recent months, as the market has gone to war against the Fed’s prediction that it will hike its benchmark rate above five percent and keep it there for some time. According to market prices, the Fed will likely halt its increases with federal funds between 4.75 percent-five percent. That would be just two more 25 basis point points hikes and then begin cutting in the later half of the year.
Ten-year Treasuries yields peaked in November. Then, they began to fall. The Treasury rates tend to be the most mechanically influenced by mortgage rates. As a result, mortgage rates fell when Treasuries that were long-dated dropped. This has had a significant impact on mortgage rates. Average rate for a 30-year fixed mortgage was 7.08 percent. It is currently at 6.15 percent. Jumbo mortgages have seen a steeper decline, with rates dropping from 7.198 percent up to 6.152%. This has boosted home affordability.
This boost to home affordability is working counter to the Fed’s aim of tightening financial conditions. This could be taken as an indication that the Fed might need to tighten more than expected to balance labor supply and market demand in order to control inflation. But the market is expecting better conditions.
NAR chief economist Lawrence Yun said on Friday that he expects that we’re past peak mortgage rates and that home sales will start to rise.
“December was another difficult month for buyers, who continue to face limited inventory and high mortgage rates,” Yun said. “However, expect sales to pick up again soon since mortgage rates have markedly declined after peaking late last year.”
This could be due to further inventory improvements. The market liquidity is improved by a decrease in interest rates, which makes it easier to trade up or down on the housing market. An empty nester with too many houses can afford a smaller home at 6 percent than they would at 7 percent. The same goes for the family that is growing and wants a larger house. For first-time buyers, this means there’s more inventory.
What does all this translate to for home prices? December’s median price for an existing home was $366,900. This represents a 2.3 percent increase over December 2021. It is quite a slowdown from the May 2021 peak of 25.2 %. It is also the least gain in price since May 2020 when much of market was frozen due to pandemic lockdowns, economic concerns, and other factors. According to Bill McBride, Calculated Risk, it seems that this trend will continue and tip prices into negative territory within the next few months.
However, the year-over-year decrease in median home prices does not necessarily mean that there is a crash. Fixed rate mortgages offer protection from rising rates and falling prices. Without a significant downturn, homeowners are unlikely to be forced sellers. Owners will not sell their home at a loss of significant proportion to the price they paid for it, but instead wait for better markets.
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