The former bustling spring home market has become subdued due to the influence of the Federal Reserve.
The Federal Reserve's attempts to reach their 2% inflation target could put a damper on the plans of many prospective homebuyers.
The hope for rate cuts, which would lead to lower mortgage rates, had seemed like a sure thing as inflation kept edging closer to the desired amount each month. However, the favorable trend has vanished as multiple measures of inflation rise once again. The result is a limited set of options for central bankers - either keeping rates at their current high levels for a prolonged period, or even raising them.
Unfortunately, this situation has prompted the spring homebuying season to take a break - and might spell concern for the remainder of the year.
"Higher rates are slowing down inventory," explained senior economist Nicole Bachaud from Zillow to CNN. "Some homeowners, who secured low-interest mortgages during the pandemic, are hesitant to sell and switch to higher monthly payments, particularly in expensive markets where mortgage costs are more sensitive to rate changes."
Yet, it's a case of chicken and egg; are buyers waiting for lower rates or analyzing the overall affordability situation?
The affordability of housing generally relies on the availability of homes on the market. But homeowners with low-rate mortgages signed during the pandemic’s era of very low interest rates have no motive to downsize and risk higher rates.
On the other hand, if home prices decrease but mortgage rates remain high, Bachaud expects a greater number of individuals would be inclined to purchase homes. At present, though, the average 30-year fixed rate shows the highest level this year while home prices are surging at their quickest pace in over a year.
Higher rates don’t deter all homebuyers
It's not just long-term homeowners who are choosing to stay put; first-time buyers are also making moves, despite the higher rates.
"Homebuyers who already own a house are more likely to hold back during this fallow spring,” stated Sam Khater, chief economist at Freddie Mac. "However, first-time homebuyers who have been on the sidelines for a while due to elevated rents or are looking to expand their families have persisted in buying during this period of climbing rates."
Some regions, such as Texas and Florida, are experiencing alleviation due to increased home construction, encouraging more buyers to look into these locations. In these places, homebuilders have even provided incentives like mortgage buy-downs to entice individuals to relocate to areas where existing homes may be more expensive.
The year ahead: potential scenarios
The spring homebuying season is critical in determining how the year will play out for the housing market. According to data from Freddie Mac since 1999, roughly a third of all home sales for the year take place between March and June.
With the Federal Reserve not showing signs of cutting rates, economists at Freddie Mac expect elevated mortgage rates to linger. This could potentially limit the supply of homes available as homeowners prefer to maintain their low-interest rates.
In spite of this, the demand so far this spring has surpassed that of last year when it comes to Freddie Mac-based mortgage applications. This, along with other factors, could pressure home prices upwards according to Freddie Mac.
Zillow's Bachaud also predicts home prices will increase during 2023, but at a lower rate. "Our forecast relies heavily on mortgage rates, which are creating their own seasonality," she remarked. "If rates drop later in the year, we might witness a second burst of home sales in the summer or fall."
However, this outcome seems improbable with investors believing the first rate cut won't happen until November, according to a look at fed funds futures.
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Source: edition.cnn.com
