Rising Mortgage Rates Cool Housing Market: Is a Crash Coming?
The housing market is definitely shifting gears. After a scorching hot few years, recent data reveals a slowdown in home sales activity. Let’s dive into the numbers and see what they tell us about the future of the market and whether a crash is on the horizon.
Rising mortgage rates are slowing home sales but prices stay high. Experts say no, unlike 2008, lending standards are stricter and inventory is low.
According to the National Association of REALTORS®, all major regions in the United States witnessed declines in sales compared to the previous month. While year-over-year data shows a mixed bag with decreases in the Northeast, Midwest, and South, the West saw an increase in sales.
Cooling Market, Rising Prices: Is a Housing Crash Coming?
Housing Market Performance
Total existing-home sales, encompassing various property types like single-family homes, townhouses, condominiums, and co-ops, decreased by 1.9% from March to April, reaching a seasonally adjusted annual rate of 4.14 million. Compared to the previous year, this represents a similar 1.9% decline. Despite this, the upper-end market segment witnessed notable gains due to increased supply, according to NAR Chief Economist Lawrence Yun.
The housing inventory saw an uptick, with a 9% increase from March and a substantial 16.3% rise from the previous year. Unsold inventory, now at a 3.5-month supply, has shown a slight increase from the previous months. Particularly noteworthy is the surge in inventory and sales for homes priced at $1 million or more, which saw a 34% and 40% increase, respectively, from the previous year.
The median existing-home price for all housing types rose to $407,600 in April, marking a 5.7% increase from the previous year. This price surge, while positive for homeowners, raises concerns about affordability and market sustainability.
Market Sentiments
According to the monthly REALTORS® Confidence Index, properties spent an average of 26 days on the market in April, down from March but up compared to the same period last year. First-time buyers accounted for 33% of sales in April, indicating sustained interest from this demographic. All-cash transactions remained stable at 28% of total sales, with individual investors or second-home buyers contributing 16% to the market. Distressed sales, including foreclosures and short sales, held steady at 2% of total sales in April, reflecting overall market stability.
Regional Trends
Regional variations provide insights into localized market dynamics. In the Northeast, existing-home sales saw a decline of 4% from March, with a median price increase of 8.5% from the previous year. The Midwest witnessed a 1% decline in sales but recorded a 6% price increase. The South experienced a 1.6% decrease in sales, accompanied by a 3.7% price hike. In contrast, the West saw a 2.6% decrease in sales but boasted a significant 9.3% price increase.
Is This a Bubble About to Burst?
While the slowdown in sales might raise eyebrows, experts say a housing market crash is unlikely for a few key reasons. Unlike the subprime mortgage crisis of 2008, lending standards today are much stricter. Back then, lenders were handing out mortgages to just about anyone, including many who couldn’t afford them.
This created a ticking time bomb, as a large number of borrowers were bound to default on their loans when faced with even minor financial hardship. Today’s stricter lending standards help ensure that homebuyers are on solid financial footing. Borrowers are required to have a good credit score, a decent down payment, and a documented history of steady income.
This significantly reduces the risk of widespread defaults, a key factor that contributed to the housing market collapse of 2008. Secondly, there’s simply not enough inventory to meet demand. Existing-home inventory did show an increase in April compared to March, but it’s still significantly lower than pre-pandemic levels. This lack of available homes keeps prices propped up, even with a decrease in buyer activity.
In a healthy market, there’s a balance between supply and demand. When there are more homes for sale than there are buyers looking, prices tend to fall. Conversely, when there are more buyers than sellers, as is the case today, prices tend to rise. The current low inventory situation creates an environment where bidding wars are common and sellers can expect to receive top dollar for their homes.
Impact of Rising Mortgage Rates
Let’s not forget the elephant in the room – interest rates. Mortgage rates have risen considerably over the past year, jumping from around 6.4% to over 7%. This increase puts a damper on affordability, especially for first-time homebuyers. The monthly payment on a fixed-rate mortgage for a median-priced home has increased by hundreds of dollars compared to a year ago. This can significantly strain a buyer’s budget, particularly if they’re already grappling with rising costs for everyday essentials like groceries and gas.
However, there is a silver lining. The rise in mortgage rates has coincided with a slight uptick in the number of first-time homebuyers. This might seem counterintuitive, but there’s a logical explanation. With fewer buyers competing for a limited number of homes, the bidding wars that were so common in recent years might be starting to ease up. This could give first-time buyers a fighting chance, especially if they are well-prepared with a good down payment and a strong credit score.
What Does This Mean for You?
So, what does this all mean for you, whether you’re a potential buyer or seller? Here’s a quick breakdown:
- Buyers: With rising interest rates and still-high home prices, affordability is a challenge. However, the lack of inventory means bidding wars might ease up a bit. If you’re financially prepared to handle a higher mortgage payment, you might find this a good time to snag a home.
- Sellers: While the market isn’t quite as frenetic as it was, there are still more buyers than sellers. This means you can expect to attract interest and potentially get a good price for your home.
The housing market is in a state of transition. Gone are the days of homes flying off the shelves with multiple offers. But with a solid job market and low inventory, a housing crash appears unlikely. The key for both buyers and sellers? Stay informed, work with a qualified professional, and be prepared to navigate this new market landscape.
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