How to Make Sense of a Confusing Housing Market

After a two-year boom in the U.S. housing market, this spring season has been seen as a dud due to a dramatic spike in mortgage rates. This stalling has stunned some industry experts and there has been an unsettling effect on the market.

While some buyers have had to handle much larger mortgage payments, some sellers began to notice offers of $100,000 over asking price may now be a thing of the past. 

“Right now, we’re in this cauldron of uncertainty,” said Jonathan J. Miller, the president of Miller Samuel Real Estate Appraisers & Consultants. “Housing hates uncertainty. The biggest enemy of the housing market is uncertainty, and we have buckets full of uncertainty.”

What is causing such a shift in the real estate market? High interest rates for one. Unless you’re able to pay in cash, buying a house got even more expensive.

Since December of last year, mortgage rates have nearly doubled. Right now they are around 6% which is the highest they have been since 2008. All in a response by the Federal Reserve to try to control inflation. At the beginning of the year, a buyer would have paid about $2,100 a month in principal and interest for a $500,000 home loan. If a buyer purchases that home today, their loan would cost nearly $1,000 more. 

Combined with the current home prices, which rose more than 20% between May 2021 to May 2022, most buyers aren’t able to make adjustments for that kind of increase in interest rates. 

“That’s a one-two punch that a lot of buyers can’t overcome,” said Rick Sharga, an executive vice president of market intelligence at ATTOM, a real estate data company.

In 1981, interest rates peaked at 18.4%. Experts aren’t thinking rates will return to those levels however until inflation is under control, rates will continue rising.

“When inflation peaks, mortgage rates will have peaked, and that’s really the key ingredient,” said Greg McBride, the chief financial analyst at Bankrate.com. “If we get more inflation numbers like we did a couple of weeks ago, there is no telling how high mortgage rates could go.”

It’s unlikely that prices will drop dramatically but there are some signs of slowing. According to a recent Refin report, 6.5% of listings dropped their prices each week.

Prices are slightly down but demand is down too. The Redfin report also found that fewer people were searching for homes and touring properties. Pending sales fell 13% and mortgage applications were down 24%. According to Redfin, this is the largest drop since May 2020.

The market could return to levels resembling the pre-pandemic era. Homes could take a few months to sell. Buyers may be able to make a few demands again– request sellers pay closing costs, asking for appraisals and inspections– rather than having to buy site unseen or pay well over asking price. However, it is still a seller’s market. According to the National Association of REaltors, the median price of a home in the U.S. rose above $400,000 for the first time.