The Housing Market Warms Up, but This Twist Could Plunge It Back Into a Freeze

Illustration by Realtor.com; Photo: Getty Images

Is the housing market back?

A surge in mortgage interest rates last year ground the real estate market to an abrupt halt, as scores of would-be buyers could no longer afford to purchase homes. But last month, as mortgage rates dipped and home prices fell from their peaks, home shoppers dipped their toes back in.

Real estate agents across the country reported buyers returned to open houses, the number of mortgage applications surged, and the most desirable homes received multiple offers again.

“What we’re seeing are the seeds of a potential spring thaw,” says Realtor.com® Senior Economist George Ratiu. But he warns that it’s too early to tell if the market will rebound this year.

“Just because we’ve had a couple of weeks of positive news doesn’t mean the market is roaring back yet,” he continues. “We’re still in the middle of a winter freeze.”

The market typically picks up after the holidays and then takes off in the spring. But on the precipice of the busy season, rising mortgage rates could drive the market back to a standstill. Large swings in rates often unnerve potential buyers, and increases erase any savings they might have found just a week ago—an extremely frustrating experience for buyers.

Rates had fallen from more than 7% late last year to just below 6% at the beginning of February, according to Mortgage News Daily. But more recently, they climbed yet again—up to 6.43% by Wednesday for 30-year fixed-rate loans. That change adds about $100 a month to the typical mortgage payment—and nearly $35,000 over the life of a 30-year fixed-rate loan. (The calculation assumes the buyer put 20% down on a $400,000 home.)

“February is going to be interesting to see what happens because of the [mortgage] rate movement,” says Devyn Bachman, senior vice president of research at John Burns Real Estate Consulting. “Consumers like it when rates don’t change. That encourages people to go ahead and make that housing purchase.”

The true test will begin in March. Those looking for a new home generally begin or pick up their searches during the warmer months, which is prime time for real estate. Prices typically rise as buyers try to outbid one another on the larger homes framed by flowers in bloom that go up for sale.

Until last week, signs were pointing to a rebound. Mortgage applications surged in the week ending Feb. 3, according to the Mortgage Bankers Association. They rose 45.6% from four weeks ago. (However, they’re still down from the highs of a year ago.)

Builders also experienced a boost. The average rate of sales of homes in new communities jumped 53% from December to January, according to data from John Burns. Typically, the rate of sales rises only about 24% over that period.

Buyers were feeling good that mortgage rates had fallen a full percentage point, home prices had fallen in some parts of the country, and the recession many feared would erupt hadn’t materialized, at least not yet, says Ratiu. Those small changes in rates and prices, plus the lowest unemployment since 1969, nudged many buyers back into the market.

The Washington, DC, metro began picking back up in mid- to late January as mortgage rates began dipping, says local real estate agent Courtney Abrams.

“We’re getting back to pre-pandemic normal,” says Abrams, a vice president at TTR Sotheby’s International Realty. “We’re seeing multiple offers in the suburbs and neighborhoods with good schools.”

One of her clients won a bidding war for a townhouse in Chevy Chase, MD, against two other potential buyers. They were able to secure the home without going over the asking price—a big shift from the past few years when she was seeing offers for hundreds of thousands of dollars more than the list price.

“It’s not the craziness that we saw during COVID, of course,” she says. “Now people are getting used to [higher rates] and learning what they can afford. ”

The lack of homes for sale is holding the housing market back

Even as open houses around the nation begin filling back up again, buyers are running up against the shortage of properties for sale. They simply can’t buy something that doesn’t exist.

The lack of housing inventory is holding the market back from the start of a recovery and keeping home prices high.

Much of the problem lies with homeowners who would typically trade up into a larger home or downsize into a smaller one. Right now, those who can’t buy in all cash generally don’t want to sell unless they have to do so. Most would prefer to hold on tight to the ultralow rates they locked in during the COVID-19 pandemic instead of having to get a new mortgage with a higher rate.

“Their desire to sell and lose that mortgage rate they’re likely to never see again is diminished,” says Matthew Gardner. He is the chief economist for the Seattle-based brokerage Windermere Real Estate, which operates in 10 Western states. So buyers “faced with limited inventory are going to find it more competitive than they would like.”

However, if rates dip below 5%, a psychological watermark for many buyers, then more homeowners would be likely to put their homes up for sale.

Lower rates also boost the buying power of buyers. For every full percentage point drop, buyers can afford to borrow 10% more.

“As [mortgage] rates come down, as most economists believe will be the case this year, that’s going to get some buyers off the fence,” says Gardner.

However, even with the reprieve in rates, they’re still significantly higher than they were a year ago when rates were in the mid-3% range. Home prices, while down a little from their peaks, have remained stubbornly elevated. Now bidding wars are back, causing prices to swell even further.

“That’s a big affordability challenge,” says Len Kiefer, deputy chief economist at Freddie Mac. “That probably is going to mean the market is going remain pretty slow in 2023. It’s really going to depend on where [mortgage] rates are.”

Why mortgage rates are climbing again

One of the main drivers of the mortgage rate increase was the U.S. Federal Reserve. The Fed has been hiking its own rates to slow down the economy in its fight to bring down inflation. (While mortgage rates are not the same as the Fed’s rates, they have been following the same trajectory lately.) And investors now believe the Fed will jack up its rates for longer than they anticipated due to the better-than-expected unemployment report that shows the economy remains strong.

“It would not surprise me if we saw an increase in mortgage rates,” says Douglas Duncan, chief economist at Fannie Mae. “The Fed has been clear they want to see the slowing of the housing market.”

On the bright side, if the Fed does achieve a “soft landing” in the economy, where inflation falls without triggering widespread financial pain and job losses, that could wind up giving the same housing market it has been trying to cool off a boost.

“If the economy avoids a severe recession, which right now seems more likely, then housing sales could be better than we would have expected,” says Ratiu.

The post The Housing Market Warms Up, but This Twist Could Plunge It Back Into a Freeze appeared first on Real Estate News & Insights | realtor.com®.