Homebuyers In The Spring Season
For many potential homebuyers, affordability is rapidly decreasing. The real estate market that has featured home prices increase by close to 20% in a year, as well as mortgage rates soaring by over one-percent to start the year. Because of this combination, buyers are being squeezed from two angles, and this trend will likely continue until something gives. And with inflation fears running rampant, many potential buyers are being led to bid too high on a property. Here is what homebuyers in the spring season should expect to see.
Price and Rates
Since the start of the pandemic housing market, prices of homes have only accelerated. With prices gaining close to a decades worth of value in less than two years, home prices have hit all time highs. Mortgage rates have been just the latest factor in the real estate market to creep up, now exceeding well over 4%. Rates have climbed at the quickest rate in almost three decades, followed by the quickest home price appreciation we have ever seen. Also, let us not forget to mention, where are you going to move? There is still close to record low inventory on the market, even with the strong listing season coming up.
Spring is typically a strong month in terms of new listings on the market. In fact, the best week to list a home has traditionally been the week we are in right now. However, this year is different. Buyers in today’s market are in a very weird spot to be in. Not only are they dealing with a historic rise in mortgage rates, but they are also dealing with the strongest competition the real estate market has ever seen. The combinations of price increases, low inventory, and accelerating increases in borrowing costs threaten to completely sideline some buyers until something changes. A lot of the current action we are seeing comes from the decades high inflation, as well as the Federal Reserve taking action to hopefully slow the booming housing market.
Inventory has, and will likely remain, at record lows. This trend has lasted for many months already, and with inventory so far behind demand, it would take a miracle for it to catch up. Something that is not helping the inventory problem is that homeowners with cheap mortgage rates are not looking to sell into a higher mortgage rate.
The Flip Side
There is some good news for buyers though. The real estate purchase craze that was sparked by easy monetary policies from the pandemic will likely end soon. There will eventually be a point when affordability destroys demand, and buyers start to pull back. The same thing in other industries is called: demand destruction. Essentially, the price of an asset, or the costs associated with the asset, rise too much too quickly and shocks buyers. This lowers demand over the near-to-long-term.
In February of 2022, home prices jumped 20% from February of 2021. This goes to show just how intense of a market we were in in 2021. Luckily, the price gains have already slowed. However, there has not been a decrease in housing prices, but some predict we may see a small pullback to those who did not sell to their advantage. Surprisingly, a prediction of a 2% price pullback in 2023 does little to help the affordability problem. If you were expected to make 25-30% in two years, one year of a 2% loss does very little to actually control prices. In fact, this type of price movement is actually healthy, and seen over many different asset markets.
Homebuyers In The Spring Season Example
A homeowner with a $300,000 mortgage would pay $1,560 at 4.72%, Freddie Mac’s current average for a 30-year loan. That’s up $277 from the start of the year, when rates were at 3.11%. Many buyers are already getting quotes above 5%.