In the US, highest mortgage rates since 2008 housing crisis is cooling sales

NEW YORK (NYTIMES) – For the past two years, anyone who had a home to sell in the United States could get practically any asking price. Good shape or bad, in cities and in exurbs, seemingly everything on the market had a line of eager buyers.

Now, in just a few weeks, housing agents have gone from managing bidding wars to watching properties sit without offers, and once-hot markets like Austin, Texas, and Boise, Idaho, are poised for big declines.

The culprit is rising mortgage rates, which have spiked to their highest levels since the 2008 housing crisis in response to the US Federal Reserve’s recent efforts to tame inflation. The jump in borrowing costs, adding hundreds of dollars a month to the typical mortgage payment and coming on top of two years of home price increases, has pushed wishful home buyers past their financial limits.

“We’ve reached the point where people just can’t afford a house,” said Mr Glenn Kelman, chief executive of Redfin, a national real estate brokerage.

The interest rate on a 30-year fixed-rate mortgage has risen to 5.81 per cent from 3.22 per cent in the first week of January, according to mortgage giant Freddie Mac. Some of that adjustment anticipated future Fed interest rate increases.

The Fed raised rates by three-quarters of a percentage point in June alone, the largest increase since 1994, and has signalled that a similarly large move is on the table in July. Any further surprises could push mortgage rates even higher.

Home prices are still at record levels, and they are likely to take months or longer to fall – if they ever do. But that caveat, which real estate agents often hold up as a shield, cannot paper over the fact that demand has waned considerably and that the market direction has changed.

Sales of existing homes fell 3.4 per cent in May from April, according to the National Association of Realtors, and construction is also down. Home builders that had been parsing out their inventory with elaborate lotteries now say their pandemic lists have shrivelled to the point that they are lowering prices and sweetening incentives – like cheaper counter and bathroom upgrades – to get buyers over the line.

It is a stark change for a market that blossomed soon after the initial shock of the Covid-19 pandemic, which for many people turned out to be a perfect time to buy a home. Rock-bottom mortgage rates lowered borrowing costs, while the shift to home offices and Zoom meetings opened up new swaths of the country to buyers who had been struggling to penetrate the market near the jobs they once commuted to.

But mortgage rates have now nearly doubled this year and inflation is eating into savings for some families as it increases household expenses. A wobbly stock market has also reduced the value of portfolios that many buyers intended to tap for a down payment.

More than any other part of the economy, housing – a purchase that for most buyers requires taking on huge amounts of debt – is especially sensitive to interest rates. That sensitivity becomes even more pronounced when homes are unaffordable as they are now. As a result, home prices and new construction are a central component of the Fed’s efforts to slow rapid inflation by raising rates. But the Fed’s moves come with an inherent risk that the economy will spiral into a recession if they stifle home purchases and development activity too much.

While housing does not account for a huge amount of economic output, it is a boom-bust industry that has historically played an outsize role in downturns. The sector runs on credit, and new home purchases are often followed by new furniture, new appliances and new electronics that are important pieces of consumer spending.

“We need the housing market to bend to rein in inflation, but we don’t want it to break, because that would mean a recession,” said Moody’s Analytics chief economist Mark Zandi.