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Will Inflation and Rising Mortgage Rates Cause Home Price Growth to Slow?

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“Supported by near-zero borrowing costs and a rush by existing homeowners to find more space, average U.S. house prices have soared by over one-third since the pandemic started,” according an article published by Yahoo! Finance. This probably doesn’t come as a surprise to any Americans who have been house hunting over the past several months and years.  With rising inflation costs and continued increases in mortgage rates, may experts are speculating what may be in store for home prices.

A poll of almost 30 property analysts revealed that Americans can expect to see home prices continue to increase by just over 10% in 2022.  Further, home prices are predicted to slow below increases of only 5% in the following year and again in 2024.  Reporters Indradip Ghosh and Prerana Bhat quote Brad Hunter, head of consultancy Hunter Housing Economics, “The rise in home prices has been staggering, and we do expect a significant slowdown going forward, particularly in the wake of a near-doubling of mortgage rates”.

Despite the slowing of home price growth, which is currently at a pace of 20% increase, affordability is predicted to still be an issue for many, specifically first time home buyers.  The rate of inflation, rising mortgages rates and, although declining, the steady continued rise in home prices are huge stumbling blocks for those looking to become home owners.  In fact, almost all of the 29 analysts polled predicted overall affordability will worsen over the next two years. 

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Photo Credit: Mohd Azrin

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House Hunting Stress and Anxiety on the Rise

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The idea of buying a new home is exciting as buyers begin to dream and envision themselves in the home of their dreams, beginning a new chapter of their lives.  However, the current state of the real estate market is causing some prospective homeowners to feel less excited, and more overwhelmed and stressed.  The process of scouring listings, trying to outbid other buyers while watching prices and rates rise is creating anxiety in some buyers. 

In a recent article published by Money.com, reporter Aly J. Yale states, “Andrea Anderson Polk, a licensed professional counselor in Northern Virginia, has even seen health issues arise due to housing stress. Her clients have experienced sleep problems, difficulty concentrating, chronic fatigue and more. Relationship problems are a common theme too.”

The article goes on to details ways homeowners can adjust their thinking and prepare for the process of searching for a home in order to make it less stressful.  For example, its suggested buyers set realistic expectations about the process to avoid disappointment or frustration.  Additionally, deciding to work with a good agent will help reduce stress because the agent can set expectations and guide the buyer through the process. Among one of the most important suggestions, buyers should pay attention to their mental health.  A therapist quoted in the article suggests, “Monitor your current mindset throughout the day and identify negative thinking patterns by avoiding ‘what if’ statements and imagining worst-case scenarios”. 

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Will Home Prices Drop with the Rise in Rates?

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The 2021 real estate market was defined by low supply, low mortgage rate and high demand.  These factors set home values soaring month after month.  Now that the spring market of 2022 is in full swing, the news of rising mortgages rates leaves real estate buyers, sellers and professionals wondering how home prices may be impacted.

In an article published by MarketWatch.com, industry experts were asked just this question.  The predictions varied slightly, but a common theme emerged.  According to the reporter, Alisa Wolfson, one expert believes that the continued shortage in the supply of homes will be a factor in the continued rise in home prices.  Another opinion, with regards to rising mortgage rates, indicates that almost 30% of purchases are cash transactions, so rates don’t affect these buyers, so demand will continue to be high.  Further, experts believe that, even buyers that need to secure a mortgage have a sense of urgency to purchase a home.  These buyers may readjust their budget based on the increased rates, but will continue to search for and purchase homes.

It would appear that many experts agree, the data and trends support the belief that the real estate market will continue to see high demand and, therefore, rising home prices. The rise may cool off a bit but its highly unlikely prices will see drastic decreases.

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Good News on Horizon for First Time Home Buyers?

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For the past several months, the news about the U.S. Housing market has repeated a very similar message month after month- high demand and low supply is driving up home prices.  In fact, the average annual home appreciation rate was recorded at 19.2% in January 2022, a record high increase.

In an article published by Fortune.com, it is stated that the number of mortgage applications recently decreased a bit, most likely in response to an increase in mortgage rates. Nevertheless, it isn’t anticipated that this will result in a significant decrease in demand for houses.  Reporter, Will Daniel, states, “After all, in March, active home listings in the U.S. were down roughly 18.6% compared to a year ago. And the U.S housing market is facing a shortage of nearly 6 million new single-family homes.”  It will take a bit more time for the housing market to balance out.

However, home buyers should remain optimistic.  Realtor.com surveyed prospective home sellers and reported that 64% of these home owners anticipate listing their home for sale within the 2022 calendar year.  The survey also might give the first time home buyers, who have largely been priced out of the market, a glimmer of hope. More than half of the homeowners who indicated they would be listing their home plan to list below $500,000, which some may consider “relatively affordable”. 

Those waiting for new construction homes may have to continue to be patient.  “We’re at the lowest level of inventory on record back at least 23 years,“ according to Redfin’s deputy chief economist Taylor Marr. “So housing starts are not quite making that large of a dent in terms of the inventory shortage just yet.”

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Photo Credit: Tierra Mallorca

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Mortgage Rate Increases Continue

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Americans who have been paying attention to the housing market realize that prices have been steadily climbing over the past several months. The fact that the supply of homes on the market has not been able to keep up with the demand for homes isn’t helping control housing prices.  Now, those looking to purchase are now going to have to face increased mortgage rates as well.

Since at least 2018, mortgage rates have not exceed 5% for a 30 year mortgage.  In reality, the rates above 5% in 2018 didn’t last long.  Prior to that short lived stint above 5% in 2018, the 30 year mortgage has remained below 5% since 2011.  Mortgage rates have been slowly increasing over the past several weeks as the U.S. responds to inflation and the economic impact on a global level due to the crisis in the Ukraine.  The 30 year mortgage now finally surpassed 5% having jumped to 5.02%.  According to an article published by CNBC.com, rates one year ago were at 3.38%.

With news of the continued rate increased coupled with the steady climb of housing prices, which have been reported to be up 20%  since February 2021, buyers will feel the hit and many might just be priced out of some markets.

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Home Values Expected to Outpace Original Forecasts

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As 2022 neared, real estate professionals began to forecast the housing market for the spring of 2022.  Many experts predicted that the drastic increase to home values that Americans saw during the height of the pandemic, would begin to slow down significantly.

Nevertheless, as March 2022 approaches, some real estate experts are adjusting their predictions.  In an article published on Nasdaq.com, Marc Rapport reports that, for example, the Zillow economists adjusted their initial prediction of a 11% increase in home values for 2022 to a predicted 16.4% increase.  The report prepared by Zillow explained, “The robust long-term outlook is driven by our expectations for tight market conditions to persist, with demand for housing exceeding the supply of available homes.”

Yet, some economists don’t see that type of growth happening again this year.  Lawrence Yun, the National Association of Realtors chief economist, predicts growth around 3-5% for 2022, continuing through 2023. “The good news is that home prices should begin to normalize later in 2022 as more homes come on the market,” Yun said in Rapport’s article.

Of course factors such as inflation, home price increase and mortgage rates affect affordability of home for many Americans.  Even as home prices level out, these other economic factors will surely impact what the future holds for the real estate market.    Read the entire article.

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Why Are Buyer’s Agents Earning Less on Home Sales?

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It has been a seller’s market in the U.S. real estate market for the past several months. Many consumers realize the low mortgage rates, coupled with low housing inventory have driven up home prices.  Buyers have been met with bidding wars and have purchased homes over asking price.  However, in some situations, the buyer’s agent isn’t getting as big of a cut, in the form of commission, as they have historically.

According to an article published in MarketWatch.com, “The average commission rate for these agents was 2.63% of the sales price of a home as of the three-month period ending Nov. 30, down from 2.69% a year earlier.”  In fact, it’s the lowest rate since Redfin began tracking the data in 2017.  The buyer’s agents are seeing smaller commission rates because, sellers, who determine and ultimately pay the commission rate to both agents, are offering anywhere from 2-2.5% commission to buyer’s agents instead of the historical 3%.  Simply put, the homes are in such demand sellers don’t have to offer larger commissions to the buyer’s agent.

Coincidentally, real estate buyer’s agents’ commission rate has been the subject of some class action law suits.  It has been argued that the “set-up is unfair to consumers” and could eventually result in buyers having to pay their own agent’s commission instead of it being the responsibility of the seller. This is a topic to continue to watch because it, coupled with eventual decline in home prices, could result in an overall reduction in the dollars in agents’ pockets.

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Slow Down in Home Price Gains Reported

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U.S. home prices have consistently risen each month in comparison to the prices in 2020.  As many Americans are aware, the onset of the pandemic created a high demand for homes and with the short supply and low rates, prices increased significantly.

However, a recent report indicates the price increases may be slowing down.  CNBC.com reports in an article written by Diana Olick, “Home prices rose 19.5% in September year over year, down from a 19.8% annual gain in August, according to the S&P CoreLogic Case-Shiller National Home Price Index. That is the first decrease in the annual gain since May 2020.”

Some cities continue to see significant increases in pricing compared to September 2020.  For example, Phoenix home prices grew just over 33% compared to September 2020.  Even some of the cities in America that reported the smallest gains still have increases of more than 10%.

The managing director at S&P Dow Jones Indices, Craig Lazzara, may have coined the most accurate description of this data:  “Deceleration”.  Prices are still strong, it just appears the growth is slowing down a bit.  The combination of an anticipated increase of homes coming on the market with mortgage rates slightly increasing are potential factors.

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Home Sales Fall for First Time in 14 Months

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The real estate market in the U.S. has been a red hot sellers’ market for several months, reflected in homes in short supply and high demand, and consistent price increases.  In comparison to August 2020, the median price of an existing home increased almost 15% by August of this year.

However, it appears that the demand for homes may be on the decline.  From July 2021 to August 2021, sales of homes dipped 2%.  In an article published by CNBC.com, it is stated, ‘“The housing sector is clearly settling down,” said Lawrence Yun, chief economist for the Realtors, who called last year’s super surge “an anomaly.’

It would seem that some buyers are deciding to wait for prices to fall or adjust, especially first time home buyers that might be priced out of the market right now.  According to the article, first time home buyers usually make up about 40% of the total buyers, but the percentage has fallen to 29%.

Additionally, it is expected that more housing inventory is on the horizon with the eviction moratorium ending.  Since the inventory of homes had been down 13% in comparison to August 2020, the additionally supply may help ease the supply issue and cause prices to adjust.

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Is the Housing Boom Over?

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Mortgage rates increased slightly this summer, yet the price of homes seemed to continue rising in response to the high demand for homes.   However, according to an article published by Yahoo! Finance, the housing boom may be winding down. Sales of new home fell 6.6% from May to June and the median home price only rose 6%, a stark drop from May’s gains reportedly in the 15-20% range.

In the article, reporter Georgia Tzanetos offers some possible reasons for the dip in demand and possible outcomes.  The article indicates “Chief Investment Officer at the Bleakley Advisory Group Peter Boockvar told CNBC that ‘the moderation in home sales is likely a combination of sticker shock and the slowdown in the ability of builders to finish homes because of a variety of delays.’”

The next several months will reveal the cause behind the slowing of demand and price increases.  If buyers are hesitant to purchase a home right now, it may be due to the “sticker shock” of rising home prices.  These buyers may begin to search for homes again and even make a purchase if they see home prices decrease in the next few months.  However, the lag in demand may be caused because, simply, “everyone who needed a home bought one…”, which would likely result in prices to continue to fall. As the remainder of the summer market plays out, real estate professionals will be watching closely anticipating what’s next for the real estate market.

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