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May has arrived, but the spring housing market is still in its infancy and may prove to be a complete bust.
April saw a 15 basis point increase in mortgage rates, while March saw a decline in both pending and existing house sales. Despite the fact that the median existing-home sales price dipped downward year-over-year for the second consecutive month—a positive sign for those looking for a home—significant, nationwide price declines are probably not in the cards.
Due to limited supply, prices are kept high and many people, particularly first-time homebuyers, are still having difficulty making ends meet. One is that, in part, as a result of people who bought houses in recent years at historically low loan rates sticking there, the nation’s housing supply is still constrained and likely will continue to be so for a while.
Though they are not as outrageous as they were in the beginning of 2022, the region’s housing market and the direction of mortgage rates will determine how much further home prices fall in 2023.
The house buying season in spring continues with bidders and sellers at odds.
Numerous potential homebuyers are still deterred by persistently high mortgage rates and home prices because of worries about ongoing inflation, bank sector volatility, sluggish economic growth, and an approaching recession.
On May 3, the Federal Reserve decided to increase its benchmark interest rate by a quarter of a percentage point, as most housing analysts had anticipated. In the event that inflation continues to decline, the Fed also hinted that it would postpone rate increases for the rest of the year. Long-term mortgages like 30-year fixed-rate mortgages are indirectly impacted by Fed rate increases.
These conditions have made the housing market difficult, which is still a mixed bag.
The median existing-home sales price decreased by 0.9% to $375,700 in March from a year earlier, according to the National Association of Realtors (NAR), which is excellent news for anyone looking to buy a house. After a record-breaking 131 months of price growth, this is the second month in a row that home prices have decreased year over year.
However, according to NAR, overall existing-home sales decreased 2.4% from February to March and are down 22% from a year ago.
According to Lawrence Yun, chief economist of NAR, “home sales are trying to recover and are highly sensitive to changes in mortgage rates.” “However, multiple offers on starter houses are relatively usual, suggesting that more supply is need to completely meet demand. Its housing market is distinct.
Some experts predict a slow recovery in the housing market.
Mortgage rates increased slightly in recent weeks, reaching 6.43% the week ending April 27, according to Freddie Mac, after several weeks of decreases in March and the beginning of April.
According to Danielle Hale, senior economist at Realtor.com, “if current economic conditions persist, with elevated mortgage rates and home prices amid scarce inventory, the market is likely in for a long, slow climb and a few bumps along the way.”
The Federal Housing Finance Agency’s (FHFA) new mortgage charge regulations are one of such hiccups. As of May 1, borrowers of conventional mortgages who put down between 5% and 25% will be subject to loan-level pricing adjustments (LLPAs), which are higher costs than those who put down less than 5%.
Although the Biden-Harris administration changed the mortgage fee regulations to make homeownership “more attainable and affordable for more low- and middle-income borrowers,” some housing experts have criticised the change because the higher fees will hit people who are seen as less risky.
Mortgage application volume is currently low, while it is unclear how the adjustments to mortgage fees would effect people looking to buy a property.
Applications for conventional and government house purchases rose last week. Joel Kan, vice president and deputy chief economist at the Mortgage Bankers Association, said that despite this, activity was still close to 28% below the rate of last year.
However, some experts believe a gradual recovery may soon get started.
According to Sam Khater, chief economist, “the 30-year fixed-rate mortgage increased modestly for the second consecutive week, but with the rate of inflation decelerating rates should gently decline over the course of 2023.” “Borrowers who are searching for a mortgage should be relieved by the likelihood of reduced mortgage rates for the rest of the year.
Since the housing meltdown of 2008, when the number of new houses being built fell dramatically, there has been a problem with low housing inventory. In 2023, it still won’t have entirely recovered.
In contrast to earlier downturns, the housing supply has remained stable at close to historic lows, supporting demand and maintaining higher home prices.
Jack Macdowell, chief investment officer and co-founder of Palisades Group, states that inventory is around 46% lower than the historical average going back to 1999.
According to NAR, the amount of unsold inventory at the current sales rate is unchanged from March at 2.6 months’ worth. Supply is low by historical standards, particularly in light of the demand that has been building up while being up from 2.0 months a year ago.
Industry analysts predict a long wait until inventories returns to normal, given that 85% of homeowners apparently have mortgage rates below 6%.
According to Macdowell, “We believe that the inventory problem will not be solved in 2023.”
Many economists predict the housing market is more likely to correct itself from the double-digit percentage jumps in home prices we’ve seen over the past few years rather than crash, in part because the ongoing inventory shortage keeps home prices elevated.
Following seven straight months of declines, the most recent S&P CoreLogic Case-Shiller Home Price Index reported a negligible 0.2% month-over-month national price growth reading. Despite higher prices year over year, price growth has recently slowed down.
However, experts predict that whether or not home prices increase or decrease in the upcoming months will likely remain regional. For instance, locations that saw significant price rises during the epidemic, such as Austin, Texas; Phoenix; and West Coast urban areas, should witness the sharpest decreases.
Housing costs are increasing in areas with growing employment and affordable housing, according to Yun. The most costly regions of the nation are adjusting to decreased pricing, though.
Many borrowers currently have positive equity in their houses, according to some experts, making them far more secure than homeowners who emerged from the financial crisis of 2008. As a result, there is little chance of a home market meltdown.
According to Nicole Bachaud, an economist at Zillow, “Homeowner equity is at the highest level it has been in the past several decades, so homeowners have a lot of value in their home.”
More than what is currently occurring, a housing market crash would typically result in a 20% to 30% drop in home prices and a decline in home sales. A spike in the number of foreclosures is another collapse sign that has gone unnoticed.
In 2023, “we assign a low(er) probability of a housing market crash, since a ‘crash’ would likely be the result of mortgage defaults, foreclosures, and forced property liquidations,” writes Macdowell.
The prospect of a recession, though, raises questions.
“We think that the potential for a severe recession and/or prolonged stagflation is the most important risk to the near-term market (and housing market) outlook,” adds Macdowell.
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