After fast-paced sales and high prices over the last year, the housing market may now be slowing down.
Last year, there was a 19% surge in home prices following the COVID-19 shutdowns. Along with the rising prices, homes sold quickly, sitting on the market for just a few days.
Now, with rising mortgage rates and record-high inflation, the housing market is showing signs of slowing down.
The National Association of Realtors reported that in June, 30-year fixed mortgage rates were at 5.7%, nearly double the average rate of 2021.
Higher rates led to lower demand for mortgages. The Mortgage Bankers Association (MBA) reported that in June 2022 mortgage applications were 12% lower than last year.
“Higher mortgage rates and heightened economic uncertainty cooled borrower demand in June, leading to new-home purchase applications declining to the lowest level since April 2020,” says MBA economist Joel Kan.
The National Association of Realtors consequently found that existing home sales have dropped. Total existing home sales fell 5.4% from May to June. Since June 2021, sales have gone down 14.2%.
But it’s still a seller’s market.
“The increase in mortgage rates has made it harder for the new-entry level home buyer,” says JPAR Real Estate CEO Mark Johnson. “The combination of rising interest rates, inflation, and home prices mean that buyers have lost close to 50% of the buying power they had just six months ago.”
The higher mortgage rates increase buyers’ expenses, meaning houses in their budget range last year may now be out of reach.
Even with the reduced demand, there is still not enough inventory, says Johnson.
“We still do not have enough inventory for demand—40% less. Still in favor of the seller but not totally nuts.”
Demand for new construction is also declining. Homebuilders are expecting fewer potential buyers and anticipate that they will make fewer sales in the coming months.
“A cooling housing market could bring good news on the inflation front,” says Stansberry Research analyst Matt McCall. “Housing is the largest component of the Consumer Price Index (CPI)—making up about a third of the CPI. If the demand for homes eases, home prices should do the same. And that would mean one of the largest parts of the CPI might come down. This is a big part of why I believe we could see inflation peak soon.”
