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The economic shock hitting the housing market

BY LANCE LAMBERT

April 13, 2022 12:56 AM MST




The message from the Federal Reserve is pretty clear: The central bank is done sitting on the sidelines as inflation eats away at Americans’ buying power. To be successful, of course, the bank will need to rein in one of the biggest drivers of runaway inflation: the red-hot U.S. housing market.

On that front, the Fed might be having some success: There's mounting evidence that the economic shock caused by spiking mortgage rates is beginning to take some steam out of the housing market.

"We saw a clear shift in the housing market as rates rose to 5% at the end of March," Devyn Bachman, vice president of research at John Burns Real Estate Consulting, told Fortune. "We are hearing about qualification issues, rising cancellations, and increased buyer hesitancy, particularly at entry-level price points and in remote locations."

When you look at the data, there are some early signs of cooling. Since housing inventory bottomed out in mid-March, it has posted three consecutive weekly increases on Zillow.com. Additionally, Redfin says it's seeing an increase in the share of sellers reducing their prices on its site, and evidence that demand for second homes is dropping.

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"Some of the new-home market's directional indicators are showing softening…fewer builders [are] raising prices from one month to the next, and sales expectations for the next six months [are] dipping," Bachman says.

Let's be clear: What we're seeing, as of now, appears to be slowing in the rate of growth—not a market correction. We're still amid one of the hottest stretches in recorded history for the U.S. housing market. Bidding wars are rampant. Inventory remains scant. And sellers have, well, pretty much all the power.

The reason more homebuyers are suddenly pushing back at record home prices is pretty straightforward: Soaring mortgage rates are pricing many of them out of the market. Back in December, the average 30-year fixed mortgage rate was 3.11%. Now many mortgage brokers are quoting borrowers at 5%. That's a bigger deal than it might first appear. At a 3.11% rate, a borrower would owe $1,710 per month on a $400,000 mortgage. But if a borrower got that loan at a 5% rate, that payment would spike to $2,147. In total, that would add up to an additional $157,337 over the course of the 30-year mortgage.

As a result of the spike in rates, active home shoppers are in a market that is beginning to resemble facets of the 2000s housing boom. Black Knight, a mortgage technology and data provider, estimates the typical U.S. family would have to spend 29% of their income to make a mortgage payment on the average-price American home. That's up from 24% in December. It also marks the highest level the metric has hit since 2007.

The reason more homebuyers are suddenly pushing back at record home prices is pretty straightforward: Soaring mortgage rates are pricing many of them out of the market. Back in December, the average 30-year fixed mortgage rate was 3.11%. Now many mortgage brokers are quoting borrowers at 5%. That's a bigger deal than it might first appear. At a 3.11% rate, a borrower would owe $1,710 per month on a $400,000 mortgage. But if a borrower got that loan at a 5% rate, that payment would spike to $2,147. In total, that would add up to an additional $157,337 over the course of the 30-year mortgage.

As a result of the spike in rates, active home shoppers are in a market that is beginning to resemble facets of the 2000s housing boom. Black Knight, a mortgage technology and data provider, estimates the typical U.S. family would have to spend 29% of their income to make a mortgage payment on the average-price American home. That's up from 24% in December. It also marks the highest level the metric has hit since 2007.

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