Springtime is spreading across the country. You can see it as daffodil, camellia, tulip and other blossoms start to emerge.
You can also see it in the increasing number of for sale signs popping up in front of homes, along with the painting, gardening and general sprucing up as buyers get ready to sell.
What buyers and sellers face
The housing market currently grapples with several challenges, including shortages in supply, elevated prices, and sluggish sales. High mortgage rates persist, potentially limiting both buyers’ affordability and sellers’ anticipated returns. Additionally, an unforeseen factor impacting the sales process is the upcoming elimination of fixed commission rates on home sales, scheduled to take effect in July.
Scheduled reports for this week and the following week promise to shed light on the market’s dynamics:
Firstly, the U.S. Commerce Department is set to release data on housing starts on Tuesday. Analysts anticipate a seasonally adjusted rate of approximately 1.4 million homes, encompassing both rental apartments and condominiums.
Secondly, the National Association of Realtors is expected to unveil figures on existing home sales on Thursday. The consensus estimate hovers around a seasonally adjusted sales rate of about 4 million homes. Notably, in 2023, the market saw around 4.1 million homes sold, marking the lowest sales rate since 1995.
Lastly, the Commerce Department’s report on new-home sales and prices is due on Monday. Analysts forecast a sales rate of 661,000 homes, including condos, representing a 1.5% increase from the previous year.
Given the imminent release of these reports, it is crucial for both buyers and sellers to stay informed about the prevailing market conditions.
Mortgage rates will stay above 5%
According to most analysts, the current rate on a 30-year mortgage ranges between 6.7% and 7%. This rate surged to 8% in October after indications from the Federal Reserve that it would cease raising interest rates. As per the Freddie Mac Primary Mortgage Market Survey conducted on March 14, the rate stood at 6.74%.
Freddie Mac plays a pivotal role in the mortgage market by purchasing mortgages from lenders and selling securities to investors, thereby bolstering lenders’ liquidity for increased lending activities.
A recent unexpected uptick in the Producer Price Index on March 14 has pushed mortgage quotes to 7% or higher, as per data from Mortgage News Daily, an entity monitoring mortgage markets.
For a median-priced home valued at $380,000 with a 20% down payment, this translates to a principal and interest payment of $2,022. It’s important to note that this payment excludes taxes and insurance. Back when the 30-year rate reached 8% last fall, the payment for the same home would have been $2,230. In contrast, in 2021, when the average rate was 2.96%, the payment amounted to $1,275. However, it’s unlikely that such low rates, short of a severe recession, will occur again in most of our lifetimes.
The consensus among economists is that current rates will likely decrease to around 6.3% by the year’s end, possibly even lower, depending on the frequency of rate cuts by the Federal Reserve throughout the year. If the rate drops to 6%, the payment on the median-priced home would be $1,823. Nevertheless, if rates fall below 5%, except in the case of a significant recession, it’s deemed improbable.
Supply will be tight, keeping prices up
Two significant factors are impacting the supply of homes for sale across nearly every market.
Firstly, homeowners who secured mortgages at historically low rates, such as 2.96%, are exhibiting reluctance to sell. This hesitance stems from the realization that selling would necessitate acquiring a new home likely accompanied by a higher-cost mortgage.
Secondly, the combination of elevated home prices and mortgage rates is effectively sidelining numerous potential buyers, particularly those in search of homes in more affordable price ranges. The Wall Street Journal highlighted a report from online brokerage Redfin, indicating that only around 20% of homes listed for sale in February were within reach of the typical household.
Moreover, mortgage rates may play a final unexpected role. A decrease in rates would enhance buyers’ purchasing power, allowing them to afford higher-priced homes. Sellers and their real estate agents are cognizant of this dynamic and may consequently raise asking prices in response to lower rates.
Covid’s last laugh: An inflation surge
Mortgage rates surged to 8% or higher due to the Federal Reserve’s efforts to combat inflation, which it has been striving to keep at 2% annually since 2022. Raising interest rates served as the primary tool in this battle against escalating prices.
In June 2022, the consumer price index (CPI) was a staggering 9.1% higher than the previous year. The underlying factors contributing to this rampant inflation were multifaceted:
Firstly, the Covid-19 pandemic prompted a global economic shutdown in 2020. Although the situation gradually improved as Covid ebbed, the process of restoring global supply chains to their pre-pandemic functionality proved to be challenging.
Secondly, oil prices soared to record levels due to the combined effects of the post-pandemic economic recovery and Russia’s invasion of Ukraine. These events exacerbated existing inflationary pressures, contributing to the most severe inflationary environment since the 1970s.
What the changes in commissions means
The long-standing tradition of compensating real estate agents will come to an end this summer following the resolution of a protracted legal dispute by the National Association of Realtors.
Under the new arrangement, sellers will no longer be obligated to pay a standard 6% of the sale price to be divided between buyer and seller agents.
Instead, both sellers and buyers will need to independently negotiate fees for services traditionally provided by agents, such as property pre-screening and contract drafting. This significant change marks a departure from a practice that has persisted for over a century, adding a layer of complexity and potentially increasing costs to the home buying and selling process.
Complicating matters further are the existing challenges, such as fluctuating interest rates. Additionally, homeowners insurance premiums have soared, particularly in areas prone to natural disasters like hurricanes, tornadoes, and forest fires. For instance, homeowners in Florida have witnessed premiums surge by over 102% in the last three years, reaching three times the national average.