For the past two years, anyone who had a home for sale could get almost any asking price. Good or bad, in cities and suburbs, seemingly everything on the market had a line of eager buyers.
Now, in the span of a few weeks, real estate agents have moved from managing bidding wars to watching properties with no listings, and once-hot markets like Austin, Texas and Boise, Idaho, are poised for big falls.
The culprit is rising mortgage rates, which have risen to their highest levels since the 2008 housing crisis in response to the Federal Reserve’s recent efforts to curb inflation. The jump in borrowing costs, adding hundreds of dollars a month to the typical mortgage payment and on top of two-year rises in home prices, has pushed wishing homebuyers beyond their financial limits.
“We’ve reached the point where people just can’t afford a house anymore,” said Glenn Kelman, chief executive of Redfin, a national real estate brokerage.
More than any other part of the economy, housing — a purchase that requires most buyers to take on huge debts — is particularly sensitive to interest rates. This sensitivity becomes even greater when housing is unaffordable, as it is now. As a result, house prices and new construction are a central part of the Federal Reserve’s efforts to slow rapid inflation by raising interest rates, which the central bank has done several times this year. But the Fed’s actions carry the inherent risk of the economy slipping into recession if they choke out home buying and development activities too much.
While housing is not responsible for a huge amount of economic output, it is a boom-bust industry that has historically played an inordinate role in recessions. The industry runs on credit and new homes are often followed by new furniture, new appliances and new electronics that are major components of consumer spending.
“We have to bend the housing market to contain inflation, but we don’t want it to break because that would mean a recession,” said Mark Zandi, chief economist at Moody’s Analytics.
House prices are still at record levels and it will likely be months or more before they fall – if they ever do. But that caveat, which brokers often hold up as shields, cannot prevent the fact that demand has declined significantly and market direction has changed.
Existing home sales fell 3.4 percent in May from April, according to the National Association of Realtors, and construction is also slowing. Homebuilders who have been dissecting their inventory with elaborate lotteries now say their pandemic listings have shrunk to the point of cutting prices and sweetening the incentives — like cheaper counter and bathroom upgrades — to win over buyers.
Understanding inflation and how it affects you
“There was a collective belief that housing was invincible — that there was so little supply and demand so high that nothing could stop price growth,” said Ali Wolf, chief economist at Zonda, a housing data and consulting firm. “A very rapid rise in interest rates and house prices has proven that theory wrong.”
It’s a big change for a market that was booming after the initial shock of the pandemic, which turned out to be a perfect time for many people to buy a home. Low mortgage rates lowered borrowing costs, while the shift to home offices and Zoom gatherings opened up new parts of the country to buyers struggling to penetrate the market near the jobs they once commuted to.
That caused prices to explode in far-out suburbs and once-affordable places like Spokane, Washington, where a large number of new home buyers left the expensive West Coast cities. People became so willing to travel long distances to buy a home that “the normal laws of supply and demand did not apply,” said Mr. Kelman.
However, after two years of rapid price increases, places that once seemed cheap aren’t anymore. According to Zillow, home prices have risen about 40 percent in the past two years, forcing buyers to stretch further and further in price, even if they no longer have a geographic location.
Now add in the mortgage interest rate, which has nearly doubled this year. And inflation, which for some families eats away at savings because it increases household spending. And a shaky stock market, which has diminished the value of portfolios that many buyers wanted to use for a down payment.
Larisa Kiryukhin and her family had long ago been priced out of the San Francisco Bay Area, where they had lived for decades. Ms. Kiryukhin, 44, is a medical assistant who was tied to her hospital, but the pandemic gave her husband, who works in information technology, the flexibility to move to a more affordable city. So Ms. Kiryukhin changed jobs, and this year the couple and their two children moved to Tampa, Florida, hoping to buy a home.
Frequently asked questions about inflation
What is inflation? Inflation is a loss of purchasing power over time, meaning your dollar won’t go as far tomorrow as it did today. It is usually expressed as the annual price change for everyday goods and services such as food, furniture, clothing, transportation, and toys.
In April, the family signed a $425,000 home contract and received a 4 percent interest rate. Then the closing date was extended because the seller wanted time to look for a new home. Then interest rates skyrocketed, adding about $700 to the monthly payment, and the family withdrew.
“I moved here to buy a house, and here we go: prices have gotten so high that we can’t afford it,” Ms Kiryukhin said.
The typical home buyer earns about $70,000 per year, according to Moody’s Analytics. A $600 per month increase in housing costs — roughly how much rising interest rates have added to the typical mortgage payment — is more than most people can bear.
Steve Silbar, a real estate agent in Spokane, Wash., said he’s seen a sharp decline in interest among buyers looking for homes under $500,000. Those buyers typically have less cash, so rising mortgage rates “has taken them out of the market,” he said.
Heather Renz and her husband, clients of Mr. Silbar, were preparing to buy a house for $360,000. Mrs. Renz is her mother’s caretaker. To qualify for a mortgage, her husband, who works as an engineer at an aerospace company, would withdraw money from his retirement account and bolster their down payment. But the stock market’s recent declines pushed the amount he could withdraw below what they needed to qualify.
“We were three quarters of the way through the process,” said Ms Renz.
The interest on a 30-year mortgage has risen from 3.22 percent in the first week of January to 5.81 percent, according to mortgage giant Freddie Mac. Part of that adjustment anticipated future rate hikes by the Fed. Officials raised interest rates by three-quarters of a percentage point in June alone, the largest increase since 1994, and have indicated a similar big move is on the table in July. Any further surprises could push mortgage rates even higher.
Inflation is at its fastest pace in 40 years, forcing the Fed to launch an aggressive policy response to try to bring it under control.
As higher interest rates slow down major purchases on credit, from homes and cars to business equipment, they can limit demand and overtake supply, dampening price increases across the economy.
Jeanna Smialek reporting contributed.