Mortgage rates rose, the number of home sales fell, and prices continued to climb in the first quarter of the year, but economists foresee the hot and frenzied housing market finally cooling for the remainder of 2022.
From inflation and supply-and-demand to war in the Ukraine, experts say the numerous economic factors at play will finally slow the housing market.
The Federal Reserve is charged with keeping financial markets stable and with inflation on the rise and the highest it’s been in 40 years, the Federal Reserve raised interest rates. The 30-year fixed mortgage rate was 5.54% in mid-May, increasing from 3.11% just two months ago.
“A couple of percentage points might not seem like a lot, but it will impact the average homebuyer, says Lawrence Yun, chief economist for the National Association of Realtors. “Mortgages now compared to just a few months ago are costing more money for home buyers,” Yun says. “For a median-priced home, the price difference is $300 to $400 more per month, which is a hefty toll for a working family.”
Mark Zandi, chief economist at Moody’s Analytics, says that swift incline in mortgage rates caused economic shock to the housing market. He predicts that the nation’s most overpriced housing markets will see a decline in home prices up to 10 percent.
Not enough supply, but plenty of demand
Experts predict the number of home sales will continue to decline. Higher interest rates and soaring home prices are making it less feasible for some buyers to foot the bill.
“Higher home prices and sharply higher mortgage rates have reduced buyer activity,” Yun says. “It looks like more declines are imminent in the upcoming months, and we’ll likely return to the pre-pandemic home sales activity after the remarkable surge over the past two years.”
Despite the decline in home sales, demand for single-family homes will continue to climb as the majority of Americans are 40 and younger, with many looking for their first homes. While the total housing starts in April were 14.6 percent ahead of the previous year, supply and demand are far from equal. The housing shortage combined with high inflation concerns David Dworkin, president and chief executive officer of the National Housing Conference.
“If we fail to address shortages in housing supply, we run the risk of fueling the fires of inflation rather than extinguishing them. The result could be ‘stagflation,’ a word most of us haven’t used in a generation–-high inflation and economic recession,” Dworkin says. “This would devastate the housing economy and only exacerbate our current housing supply challenges.”
Uncertainty with war in Ukraine
When Russia invaded the Ukraine, the U.S. banned Russian oil. As a result, there was a hike in energy prices, which could cause consumers to cut back on spending. It can also hurt supply-chain issues, which impact the cost of building—a ripple effect that could impact the housing market and the economy.
“Geopolitical conflicts seem to be the wild card and the one that could have further impacts on inflation,” says Selma Hepp, deputy chief economist at CoreLogic.
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