Housing market slows as mortgage rates and consumer fears rise

The red-hot housing market of last year is increasingly slowing as interest rates and consumers fears rise. 

James Colestro, executive vice president, retail lending and business banking, Northwest Bank, said the housing market is in the process of slowing as rising mortgage rates are weighing on housing affordability. 

“While we saw a little pickup this week, existing home sales have fallen every month through the end of August after peaking in January,” he said. 

There was a 12.6% decrease in new single-family home sales in July, which is a seven-year low, said Brad Sanders, director of Personal Wealth Management at Stonebridge Financial Group. 

 And listings are sitting on the market for 12.5% longer than they were a year before, and construction is also slowing, he said, due to the reduced demand and ongoing supply issues. 

At the same time, Colestro said home prices have remained strong. “There’s always a little lull when kids go back to school, but beyond that we’re seeing continued year-over-year increases to home prices mixed with sharply rising rates, and it’s taken a lot of people out of the market.“ 

Sanders said while inflation has slowed slightly, it hasn’t slowed as much as the Federal Reserve would like so, more than likely, they are on pace to continue raising interest rates. The Fed increased interest rates by 0.75% Sept. 21. 

“As such, mortgage rates could continue to rise past 6%, which is already the highest we’ve seen since the Global Financial Crisis of 2007-2008,” Sanders said.  

“While the increase in the fed funds rate was widely expected, higher rates have certainly had an impact on residential real estate.  The U.S. 30-year mortgage rate has risen to around 6.25% after averaging just 2.96% in 2021,” Colestro said.  

The higher rates, he said, are not only affecting affordability, but it’s also creating so much uncertainty that it’s causing some potential buyers to stay on the sidelines. 

Colestro cited an example of the monthly payment on a $250,000 house at current rates is approximately $500 per month more than in January. 

Because of the uncertainty in the market, “What remains to be seen is how sharply housing prices will fall, but we don’t expect a housing crash or financial crisis as bad as what we saw in 2007-2008,” Sanders said. “Lending standards have increased substantially since then, and there is still a supply/demand imbalance due to years of lower new home builds.” 

“Typically, a higher interest rate environment is less favorable for home prices due to higher monthly payments.  The Case-Shiller U.S. National Home Price index is still increasing, but prices are appreciating at a slowing rate.” Colestro said.  “It’s certainly not the seller’s market it was last year, and sellers can no longer expect homes to sell in a matter of weeks.” 

Sanders agreed. “The seller’s market has certainly cooled, and at this point, both buyers and sellers are being incentivized to remain on the sidelines. Buyers think prices might come down further, and sellers don’t want to give up the low mortgage rates they have locked in.” 

The labor market is also still quite tight, Sanders said, and the average homeowner has high equity in their home, so the pressure to sell isn’t very strong. According to Fannie Mae’s Home Purchase Sentiment Index, the percentage of consumers who believe it’s a good time to sell has decreased from 57% in May to 24% in August, he added. 

At the same time, Sanders said home construction has slowed down as builders have grown more worried about reduced demand due to the higher mortgage rates.  

Colestro said, as a result, an increasing number of builders are reporting taking action to try and increase activity including reducing prices, assisting with rate buydowns, and offering free or reduced-price upgrades to the project. 

“Builders also continue to grapple with increased construction costs due to supply chain problems and aggressive monetary policy. Even though housing starts surprisingly increased in August, builders are cautious, and permits to build new houses fell 10% in August,” Sanders said. “It would not be surprising to see softening in home construction in the coming months, as leading indicators are suggesting.” 

  One of the factors that continue to drive up housing prices, Colestro said, especially for new builds is the rising cost of raw materials needed for construction.  These prices for construction material will eventually find their way into the price of the new home, he added.   

In addition to the cost of raw materials, homebuilders are finding shortages and delays in getting the materials and are having a difficult time finding employees, further complicating the home building process.  As a result, we have seen new housing starts slow from higher levels in late 2021 and early 2022. 

 “We suspect many developers may delay construction on some projects until the economic environment improves and they feel better about the prospects of selling,” Colestro said. 

 Most of the predictions for 2023 show an overall decline in the mortgage market compared to 2022, Colestro said, but it’s a little bit skewed as there was still robust refinance activity in the first quarter of this year. 

 “Early predictions show purchase activity to be on the rise next year,” he said. “One thing we know in mortgage lending is that it’s an incredibly cyclical business. It may be tough right now, but rates will come back down and today’s purchases at 6.25% will be tomorrow’s refinance at 4.50%. It may take a little time, but we’re confident the market will come back.”