The fate of the real estate boom worries both homeowners and homebuyers these days. Will record home values lead to a crash reminiscent of the one that made the Great Recession so painful? Or will prices simply take a breather from their rapid pace of appreciation?
I would say if you are a homebuyer or a young person looking to buy a home, you need a little reset.
– Jerome PowellChairman of the Federal Reserve
Nobody knows – not even the most powerful central banker in the world. During the press conference following last week’s Federal Reserve Open Market Committee meeting, Fed Chair Jerome Powell confirmed a sharp rise in mortgage rates. They have increased from 3 percent in August 2021 to 6 percent now, according to Bankrate’s national survey of lenders.
“We’re aware that mortgage rates have gone up a lot and you’re seeing a changing housing market,” Powell said in response to a question from Mark Hamrick, senior economic analyst at Bankrate. “We’re watching it to see what’s going to happen. How much will it really affect housing investment? Not really sure. How much will it affect property prices? Not really sure. We are monitoring this very closely.”
What it means for house prices
Housing economists do not expect sharp price declines, at least nationwide. After all, the supply of homes for sale remains near record lows. And while a rise in mortgage rates has dampened demand somewhat, demand still exceeds supply thanks to a combination of low new construction and strong household formation by large numbers of millennials.
The National Association of Realtors said Tuesday that rising mortgage rates have slowed home sales. Despite this, the median price of homes sold nationally hit a record $407,600 in May, up 14.8 percent from May 2021, and the inventory of homes for sale remains down from a year ago.
“It’s still a very tight market,” Powell told reporters in last week’s remarks. “Prices may continue to rise for a while, even in a world where interest rates are rising. It’s a complicated situation.”
Powell: Buyers need to ‘reset’
The sharp rise in home prices over the past two years has made affordability a major challenge, especially for first-time home buyers. Unlike repeat buyers, first-time buyers have not built up an equity cushion as prices have risen sharply since 2020.
“I would say if you’re a homebuyer or a young person looking to buy a home, you need a little fresh start,” Powell said.
While the Fed doesn’t directly control mortgage rates, it does set the Federal Funds Rate, a number that both reflects economic reality and attempts to guide economic activity toward sustainable levels of growth. The Fed cut interest rates to zero at the start of the coronavirus pandemic.
“Rates have been very, very low for quite a while because of the pandemic and the need to do everything we can to support the economy when unemployment was 14 percent and the actual unemployment rate was well above that,” Powell said.
But as inflation has accelerated to 40-year highs, the Fed has responded by raising interest rates three times in 2022 — including a 0.75 percentage point hike last week.
What you can do
How homebuyers can deal with the still challenging market:
- Look for a mortgage. Rates and fees vary significantly from one lender to the next. Comparing at least three offers from competing lenders can save you thousands of dollars over the life of the mortgage.
- Look for a low down payment loan. For borrowers who can afford to buy their own home, the monthly payment is just one hurdle. Another comes with a deposit. For a typical US home selling for about $400,000, a 10 percent rent reduction means writing a $40,000 check. However, there is a potential solution in the form of mortgages backed by the Federal Housing Administration and the US Department of Veterans Affairs. Both FHA loans and VA loans are subject to less onerous restrictions than traditional loans. While the standard down payment is 20 percent, VA loans require no down payment and FHA loans have a minimum down payment of 3.5 percent.
- Consider a fixer upper. For buyers frustrated by the lack of inventory and skyrocketing prices, older homes can be a good compromise. In Bankrate’s poll earlier this year, 21 percent of respondents said they would try the tactic. With the purchase of a fixer-upper, you are of course tackling a project that involves uncertainty. No matter how meticulous you are about your renovation budget, you can expect surprises—especially at a time when material costs are fluctuating and construction workers are scarce. Renovation experts say you should expect cost overruns in the range of 15 to 20 percent of your construction budget.
- Change to a cheaper area. Many shoppers face the harsh reality that they can’t afford to shop in the neighborhoods they really want. In some cases, buyers choose to exit the toughest markets. Real estate prices have skyrocketed everywhere, but in California, prices are particularly staggering. The median price of an existing home sold in Silicon Valley in the first quarter of 2022 was $1.88 million, according to the National Association of Realtors. In San Francisco, the typical price was $1.38 million and in Orange County, it was $1.26 million. However, some large metro areas still boast affordable real estate prices. These include Buffalo (Q1 average selling price of $202,300), Philadelphia ($297,900), Louisville ($235,400), St. Louis ($216,700), Kansas City ($287,400) and Milwaukee ($298,800).