With interest rates on the rise, the housing market has become a major bidding war for a dwindling supply of houses…and first-time buyers are being left out.
Mortgage applications—especially mortgage refinance applications—have been rolling in at a snail’s pace this year…and it looks like it’s only going to get slower.
I mean, given the fact that interest rates are rising across the economy (Thanks, Fed!), this makes sense.
Mortgage rates have jumped, and that has caused mortgage applications to fall.
Economics 101, folks!
I know, I know. You guys would rather me discuss the Metaverse or some tech stock or crypto, but the housing market is super important to the health of the economy.
So, please indulge me.
According to the Mortgage Bankers Association, mortgage application volume fell another 6% last week, and volume has declined 41% from the same week a year ago.
This decline has coincided with interest rate increases on 30-year fixed-rate mortgages to 4.9% from 3.36% a year ago.
CNBC reported, “Applications to refinance a home loan, which have been falling steadily for months, dropped another 10% week to week. Refinance demand was 62% lower than the same week one year ago. The refinance share of all applications fell to 38.8% from 51% a year ago.”
The market remains hot—at least for now—due to increasing wage growth and high demand, but the supply of existing homes remains lower than demand, which has been creating epic bidding wars, keeping prices higher and entry-level buyers watching from the nosebleeds.
Economists and investors are split on the state of the housing market.
With interest rates on 30-year mortgage rates rising and demand still outpacing supply, the question remains: Is the housing market heading towards a crash?
The situation is being further complicated by the expected reduction of mortgage-backed securities from the Federal Reserve’s balance sheet.
As you may recall, the Fed ballooned its balance sheet to $9 trillion in response to the pandemic-induced economic shutdowns, much of that debt was in the form of mortgage-backed securities.
Rising mortgage rates have encouraged home shoppers—especially first-time millennial homebuyers who accounted for 43% of home purchases—to jump into the market to lock in a lower interest rate knowing that mortgage rates are going to continue to climb.
See, the millennials aren’t as dumb as they seem…sometimes. (I am an elder Millennial, so I can make that joke.)
So, in the short term, housing prices continue to skyrocket.
However, will this trend continue in the long term?
That is an open question at this point.
Higher interest rates make homes less affordable for consumers which could dampen home prices.
Demand falling could cause a subsequent decline in home construction as well, which could be another contributing factor to a decline in housing prices.
According to James Knightley, chief international economist at ING, this could increase the “likelihood that the housing market will start to move from one of significant excess demand, to one where we are better in balance.”
Home sales did fall in February by 6% according to the Commerce Department, so these trends might already be taking place.
Real estate markets might not be a sexy market to talk about like tech or crypto, but it has historically been a good barometer for the economy. Anyone who was alive in 2007-2009 knows what I am talking about.
If you know, you know…