Surging Mortgage Rates Suppress Home Sales to Historic Lows

In a significant real estate development, U.S. mortgage rates have reached their highest point in 23 years, thereby driving home sales to their lowest levels since the subprime crisis era. Forecasts by numerous economists indicate that 2023 is anticipated to witness a decline in sales of previously owned homes to a level not observed since at least 2011. This period marked a time when the U.S. population was smaller, and the nation was still grappling with the aftermath of one of the most severe housing crises in history.

Chen Zhao, Economics Research Lead at real-estate brokerage Redfin, estimates that the total number of existing home sales for 2023 is projected to be around 4.1 million. Such a figure would represent the smallest number of sales since approximately 2008, the year when Lehman Brothers’ collapse ignited the global financial crisis. Zhao believes that sales are unlikely to experience a substantial rebound next year, with mortgage rates expected to remain elevated. This scenario paints a picture of a prolonged market slowdown.

The current housing slowdown differs significantly from the previous one, which followed the bursting of the housing bubble in the early 2000s. During that time, the U.S. economy plunged into a deep recession, leading to millions losing their homes through foreclosure. In contrast, the ongoing slowdown in home sales, which has persisted for over a year, can be attributed to rising borrowing costs, record-high home prices, and a severely limited housing inventory. Most recently, the rapid ascent of mortgage rates is discouraging all but the most determined homebuyers. According to Freddie Mac, the average rate for a 30-year fixed mortgage reached 7.57% last week. This represents a half-percentage point increase since August when rates crossed the 7% threshold for the first time in nearly a year, leading to home sales declining to their lowest point since January.

Further exacerbating the situation, the Mortgage Bankers Association reported that purchase mortgages dropped to their lowest levels since 1995, providing a clear indication that home sales will continue to face headwinds in the forthcoming months.

Historically, the housing market experiences a slowdown during the fall and winter months, often accompanied by a reduction in prices as many families refrain from moving during the school year and buyers defer their property search during the holiday season.

Should full-year existing home sales ultimately fall below the anticipated level of four million, it would signify the first time since 1995, as reported by the National Association of Realtors. This shrinking housing market is expected to have ripple effects throughout the broader economy.

The consequences could compel potential homeowners to continue renting, potentially leading to a rise in rent. Higher rents contributed to an increase in U.S. consumer prices in September, posing a challenge for the Federal Reserve’s interest-rate policies should rents continue to rise. Slower home sales could also impact economic growth by limiting spending on housing-related items such as appliances and furniture, while prompting home builders to scale back new construction.

Nonetheless, it is essential to recognize that the slowdown in home sales is not uniform across all regions. Well-maintained homes in desirable neighborhoods continue to sell quickly, often exceeding the asking price. However, it is noteworthy that nearly 18% of homes listed in September had price reductions, marking the highest level since November 2022, as reported by Realtor.com.

Market conditions have indeed started to slow down, as described by Steven Fischer, a real-estate agent in Savannah, Georgia. The real estate landscape is now marked by increased open houses, price reductions, and sellers offering incentives to attract buyers.

The issue of home-buying affordability remains a central concern. As per the National Association of Realtors, home-buying affordability plummeted over the summer to the lowest level since 1985. This situation implies that in many markets, only those with higher incomes or substantial cash reserves can presently afford to buy homes. It is essential to note that while mortgage rates are on the rise, home prices are not witnessing corresponding declines. Many homeowners who bought or refinanced their homes when mortgage rates were lower are unwilling to sell, leading to a supply of homes for sale far below historical norms.

Furthermore, home builders, despite a more robust first half of the year than expected, are also experiencing a pullback. Builders have benefited from the scarcity of existing homes in the market and their ability to provide incentives that can lower buyers’ mortgage rates. However, with rates remaining at current levels, reducing the rate by a percentage point or more may not be sufficient to entice buyers.

In this scenario, home builder confidence has declined for the second consecutive month, with 32% of builders reporting price cuts in the past month, according to the National Association of Home Builders. Additionally, only 16% of consumers surveyed by Fannie Mae in September believed it was a favorable time to buy a home, matching the record low since mid-2010.

The combination of limited inventory, rising interest rates, and escalating home prices presents a formidable challenge for prospective homebuyers like Yonatan Hochstein and his wife in New Jersey. They’ve been searching for a house for approximately a year, only to find that inventory limitations, rising interest rates, and soaring home prices have made the process progressively more challenging.