The frenzy of homebuying over the last two years appears to have reached its breaking point. Overall mortgage demand is at its lowest level since 2018, according to the Mortgage Bankers Association, with refinance activity down 70% year-over-year. The MBA’s data shows that purchase applications are down 17% annually. 

The main headwind for buyers is rising interest rates. Since the beginning of 2022, rates have risen 155 basis points hitting 5.1% on average for a 30-year fixed-rate loan, according to Freddie Mac’s latest data. Freddie Mac’s economists say, “The combination of swift home price growth and the fastest mortgage rate increase in over forty years is finally affecting purchase demand. Homebuyers navigating the current environment are coping in a variety of ways, including switching to adjustable-rate mortgages, moving away from expensive coastal cities, and looking to more affordable suburbs. We expect the decline in demand to soften home price growth to a more sustainable pace later this year.

Further hampering the purchase power of Americans is quite simply the cost of available homes. The S&P CoreLogic Case-Shiller National Home Price Index shows that home prices rose at a nearly 20% pace in February—the third highest reading in the 35-year history of the index. Keep in mind that this index is a three-month running average and only goes through February. Significant increases in mortgage interest rates didn’t hit until March so it’s possible that next month’s data could start to incorporate the impact of rising rates pushing down home prices. 

One indicator of how mortgage rates are affecting home sales is to look at the new home sales data from the Commerce Department. The latest data shows that sales of new single-family homes in the U.S. dropped by 8.6% month-over-month in March. New home sales are counted when a contract is signed, making them a leading indicator of the housing market. Annually, new home sales were down 12.6%. 

But it’s not just the mortgage rates that are causing potential homebuyers to back away from putting in an offer. The median price for a new home in March was up 21.4% annually, according to the Commerce Department, hitting $436,700 with almost all of the new homes sold in March above $200,000. Furthermore, most of the inventory available is still under construction or yet to be started. The Commerce Department’s data shows that more than 65% of the inventory is still under construction with nearly 26% yet to be built. 

With demand seemingly cooling off, interest rates potentially hitting a plateau and home prices hopefully slowing down, it’s possible we could start to see some stabilization in the housing market. The Federal Open Market Committee meets May 3-4 and is expected to raise the federal funds rate by at least a half point. While that is already baked into what we are seeing economically today, it will be critical to hear the language used by Federal Reserve Chair Jerome Powell in setting the tone for the rest of 2022.

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