While some buyers forged ahead, others put their home search on hold or gave up altogether because rising costs put home ownership out of reach.
“Affordability is the biggest issue in the housing market today, and higher rates will make it worse on a monthly basis,” said Skylar Olsen, chief economist at Zillow.
Mortgage rates will stabilize
The big surprise for those looking to buy a home in the first half of the year was how mortgage rates rose so much, so quickly. Interest rates for a 30-year fixed-rate mortgage fell from 3.22% in early January to a year-to-date high of 5.81% in June, according to Freddie Mac. In recent weeks, average rates have stabilized around 5.5%.
“Someone who buys the same house today that they wanted to buy last year will see a 50% increase in their monthly payment,” said Lawrence Yun, chief economist of the National Association of Realtors. “People’s incomes don’t go up 50% in a year. Homebuyers are frustrated. This year they’re in total disbelief that they don’t have the money to buy at a 6% mortgage rate.”
The cost of financing a home is so high that nearly 15% of people who signed a contract to buy a home in June pulled out, according to Redfin. This is the highest share of canceled home sales since April 2020, when the market came to a virtual standstill due to the pandemic.
But Yun said that while mortgage rates could rise or fall in the coming months, the biggest jumps have already happened.
“We may be overshooting mortgage rates,” he said.
Yun noted that mortgage rates may already have largely “priced in” current and expected Fed interest rate hikes. He expects mortgage rates to settle near 6% by the end of the year and home sales to normalize once mortgage rates become more stable.
Inventory will increase from last year
As the market slows, potential buyers who continue to search for a home will have less competition and more homes to choose from, providing more breathing room than the frenetic market of the past two years.
Economists largely met their home price forecasts for the first half of the year, with annual price growth peaking in the spring and moderating as the year progressed. But the number of sales at this point in the year is well below expectations, said Jeff Tucker, economist at Zillow.
“Sales volume was hit much harder than prices,” he said. “Buyers resisted these mortgage rate increases longer than we thought, which kept prices high. But some buyers started to give up.”
Yun said he expects 2022 sales to be down about 13% from last year.
The upshot, Tucker said, is that as sales volumes continue to decline, inventory will rise.
The surge in demand for buying a home over the past two years has led to a record high inventory of homes to buy, which has driven up prices. In June, inventories saw their first year-over-year rally in three years. The number of homes available for sale at the end of June was up 9.6% from May and 2.4% from a year ago, according to NAR.
House prices will rise more slowly
But the pace of price growth has been slowing down lately. Median existing home prices rose 13.4% in June from a year earlier, compared to the 23% home price surge in June 2021, according to NAR.
In addition, new home prices are falling. The median selling price of a new home under construction fell to $402,400 in June from $444,500 in May, according to the US Census Bureau and the Department of Housing and Urban Development.
“This is the biggest crack yet in home price inflation,” said Robert Frick, business economist at Navy Federal Credit Union. “If existing home prices follow suit, we could finally see a pause in the annual increases that have driven millions of Americans out of the housing market.”
New homes represent around 10% of transactions and existing homes the remaining 90%. And the prices of the vast majority of the market do not drop.
As higher mortgage rates dampen buyer demand, inventories will rise and sales will fall, which should help moderate prices for the rest of the year.
“Houses can stay on the market longer, there will be more properties with price reductions,” Yun said. “Buyers who do more thorough homework may be able to find a home with a price reduction or get a better price negotiation.”
Affordability will remain a challenge
But during the housing bubble, the lack of affordability was due to mortgages offering interest rates as low as 1% that were reset to a level that homeowners could not reliably afford. And in the 1980s, homes were unaffordable due to incredibly high interest rates – with 30-year fixed rate mortgage rates ranging from 9% to over 18%.
Today’s market is different, the researchers wrote. “The spike in housing costs is due to the cumulative impact of apparent underproduction between 2008 and 2020, housing supply chain failures since 2020, and increased demand since 2020.”
And that probably won’t change much by the end of the year.
Sam Khater, chief economist at Freddie Mac, said he expects demand from homebuyers to continue to cool at a more normal pace of activity – but the ability of many people to buy a home will remain difficult.
“The Federal Reserve’s action to help manage inflation has created significant volatility in mortgage rates and, by extension, the housing market,” Khater said. “Although home price appreciation will increase at a more moderate pace, home prices remain elevated relative to homebuyer incomes. Taken together, these factors are exacerbating affordability issues and causing a slowdown in the housing market. “