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New data suggests ‘serious’ real estate market correction – Washington Examiner

In a dramatic shift from just a few months prior, the once-hot real estate market is quickly cooling as home sales fall off due to soaring mortgage rates, experts say, ushering in an awaited correction.

Pending home sales in the United States dropped 35% in recent weeks compared to the same time last year, according to data from Redfin, a major real estate company.

“That represents the largest annual decline and the fewest homes under contract in any October since at least 2015 when Redfin’s weekly housing market records began,” the company said late last month.

HOUSING PRICES SEE RECORD DECELERATION FOLLOWING SOARING MORTGAGE RATES

As the average 30-year fixed mortgage rate hovers above 7%, the number of people seeking new mortgages also continues to dip, recent data show. Mortgage applications for single-family homes have dropped 41% since one year ago, the Mortgage Bankers Association said.

“Mortgage applications declined for the sixth consecutive week despite a slight drop in rates,” Joel Kan, the group’s vice president and deputy chief economist, said in a Nov. 2 news release. “The 30-year fixed rate decreased for the first time in over two months to 7.06 percent, but remained close to its highest since 2002.”

As national real estate data continue to show a slowdown in buying and selling, home prices in some expensive urban areas have started sliding, while in other areas, buyers are regaining some negotiating power. The change comes after a spring of supercharged activity in which homes would sell for tens and even hundreds of thousands of dollars over their list price.

“With many buyers forced out of the market, housing demand has cooled,” Nadia Evangelou, a senior economist and director of forecasting at the National Association of Realtors, told the Washington Examiner Magazine. “First of all, we see existing home sales have dropped for the last eight straight months. And this is the longest slump since 2007 for home sales activity.”

“We expect about 5.2 million homes to be sold in 2022, and this is about a 15% decline from 2021,” Evangelou added. “Even fewer homes will likely be sold in 2023 — about 4.8 million homes.”

“Homebuying activity next year, in 2023, will likely go back to 2012 levels,” she said.

Taylor Marr, Redfin’s deputy chief economist, said that until last month, “the pullback in the housing market could be described as something of a return to pre-pandemic conditions before sub-3% mortgage rates ignited a homebuying frenzy in 2020 and 2021.”

Now, however, “both mortgage purchase applications and pending sales are below 2018 levels,” Marr said. “A four-year setback is a serious correction.”

In September, Federal Reserve Chairman Jerome Powell said home prices had risen “at an unsustainably fast level” and that a correction would likely be necessary to stabilize the market.

“For the longer term, what we need is supply and demand to get better aligned so housing prices go up at a reasonable level, at a reasonable pace, and people can afford houses again. We probably in the housing market have to go through a correction to get back to that place,” Powell said.

Since then, mortgage rates have hit historic peaks as the Fed continues to hike interest rates in an effort to tame record-high inflation. But despite several major rate increases from the U.S. central bank since earlier this year, the consumer price index, which measures how much people are paying for goods and services across the country, remains high — and housing prices are accounting for a significant portion of it.

“The index for all items less food and energy rose 6.6 percent over the past 12 months, the largest 12-month increase in that index since August 1982,” the Department of Labor Statistics said in its most recent CPI release. “The shelter index also rose 6.6 percent over the last year, accounting for over 40 percent of the total increase in all items less food and energy.”

On Wednesday, the Federal Reserve announced another rate increase of three-quarters of a percentage point, the latest in a series of aggressive hikes this year, confirming that mortgage rates will remain high for months to come — if not longer. As a result, home prices could drop (at least in some areas) more noticeably as mortgages become unaffordable to more potential buyers, experts say.

“One of the surprising factors is that home prices continue to rise, even though demand has slowed down,” Evangelou said. “But the main reason for that is tight supply. So since we have a severe housing shortage, we don’t expect home prices to drop, [but] we see a deceleration.”

In other words, home prices are rising, but not as fast as they were earlier this year. “And we expect by the end of the year, home prices [will] decelerate even further,” Evangelou said. “We expect to have about 5% price gains by year-end. So when we compare the median price home in December of 2022 with December 2021, we expect to have about a 5% gain. And next year in 2023, again, we don’t expect a price drop. We expect home prices to be relatively flat, about a 1% price gain in 2023 compared to 2022.”

However, “all real estate is local,” she notes, and some higher-priced regions, such as the San Francisco Bay area, are seeing prices drop.

“We expect all these more expensive areas to be affected more by their rising home borrowing costs,” she said. “Also some other areas that we see that will experience price declines are the ones [where] home prices rose very fast […] in the last two years,” such as Boise, Idaho.

Even in Washington, D.C., which boasts a fairly stable real estate market due in part to the job security offered by the federal government, things are changing, says Nancy Miranda, a realtor with RE/MAX Allegiance.

Though prices haven’t fallen significantly, “D.C. has shifted,” she told the Washington Examiner Magazine. The region, including the nearby Maryland and Virginia suburbs, “has shifted into a negotiating market,” Miranda said. “Buyers are able to negotiate repairs, closing help, free things.”

Miranda said she also expects the local market “to slow down more” if mortgage rates keep going up.

“I do feel a correction is on the way, because what we had was not normal, the value of the dollar, the value of everything cannot thrive on a 3% rate,” Miranda said. “I do think that this correction is going to be growing pains.” She said for the Washington-area real estate market to crater, it would need to experience a “full-blown recession” or a catastrophe, such as a natural disaster.

But otherwise, she expects the market to remain relatively stable because of its consistently strong job market — as it mostly did during the nationwide housing crisis of 2008. “I was still pretty busy in 2008,” she said. “Was I as busy as I was in 2018? No, but there was steady sales still happening in that time.”

At a broader level, Evangelou says she also doesn’t expect a repeat of 2008 as a result of the recent downturn.

“For California, we expect home prices to drop by about 10%,” she said. “But again, remember that home prices are very high already. So if you bought your house like 10 years ago, I don’t think it makes a big difference.”

“If you compare it with last year, yes,” she said. “But as we know, home buying is […] not an investment that you do like for a shorter period.”

“Remember, 2021 was the best year in the housing market since 2006. So we expected to have this slowdown,” she added.

However, Evangelou and the NAR are “very concerned” about the effect of high mortgage rates on first-time homebuyers. “It’s not just mortgage rates. Rent continues to escalate at 40-year highs, making it even more difficult for them to save for a down payment,” she said.

“Nearly half of the renters are already cost-burdened,” Evangelou said. That means they spend more than 30% of their income on housing, she added. “And with mortgage rates at 7%, more people may need to rent for longer, putting additional upward pressure on rents — and inflation as well.”

Evangelou said they are also concerned that “minority groups may be impacted more heavily” by the current market.

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“With 7% mortgage rates, only 15% of black households can currently afford to buy a typical home compared to 30% of white households,” she said. “Black families may fall further behind in homeownership compared to their white counterparts.”

But the rock-bottom 3% mortgage rates of the last couple of years aren’t likely to return, Evangelou said. “So it seems that the 7% like rates may be the new normal.”

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