The Fed wants to cool the U.S. housing market. Here’s what that feels like | Ezine Daddy

May 2 (Reuters) – In mid-April, after months of increasingly frustrating house hunting, Harsh Grewal and his wife settled on an apartment in suburban San Francisco and prepared an offer above the list price so they could have a chance to outperform other listings in one of the nation’s hottest housing markets.

He then checked his phone and saw several alerts, all of which advertised reduced prices for other homes they had been tracking. The Grewals withdrew their offer and put their search on hold, hoping it was a sign the market was finally cooling. “I want to see where this goes and where the dust settles,” Grewal said.

That’s exactly what Federal Reserve policymakers are hoping to see more of as they hike interest rates to bring down 40-year-high inflation.

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A mainstay of their efforts is to take the heat out of the real estate market, where low borrowing costs were introduced to cushion the economy ahead of the COVID-19 pandemic, which has helped house prices soar 35% over the past two years . While home prices aren’t part of the inflation indexes that the Fed tracks, they do factor into other factors — such as rents — that affect inflation.

Rising interest rates mean that borrowing for a home suddenly becomes more expensive. The yield on 10-year Treasury bills, a benchmark for mortgage rates, has risen on expectations of rapid Fed rate hikes. According to the Mortgage Bankers Association, the average interest rate on 30-year home loans is now 5.37%, up more than 2 percentage points year-to-date.

So buyers of a typical existing home that sold in March for $375,000 will pay $440 more each month than they did in December if they pay back 20% and borrow the rest at a fixed rate for 30 years.

Higher interest rates account for most of this. Meanwhile, inflation is also driving up food bills and gas costs.

“The housing market is definitely out of whack,” said Fed Governor Christopher Waller, who last month recounted how he sold his St. Louis home to a cash buyer without an inspection. “We’ll see how interest rates start to cool things down going forward.”

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“A TURNING POINT”

The last time mortgage rates rose so rapidly was in the spring of 1994. Overall home sales fell 20% as the Fed hiked interest rates and home price growth slowed.

Economists are forecasting a decline in sales and slowing price growth this time around, perhaps to an annual rate of about 5% by the end of the year.

But an unprecedented array of factors, including a record low housing stock, unusually high household savings, an extremely tight labor market and increased worker mobility, are generating crosscurrents that could throw this forecast off course.

March home sales were the lowest in nearly two years, according to the National Association of Realtors. Mortgage applications are also declining.

List price declines, such as those noted by the Grewals, are more common, accounting for 13% of homes for sale in the four weeks from mid-March to mid-April, up from 9% a year ago, according to property firm Redfin.

At the same time, mortgage applications remain above pre-COVID levels and home prices hit a record as homes were typically auctioned within 17 days of listing.

Some of this could be a last-ditch effort from buyers, particularly buyers with pre-approved financing, who are scrambling to purchase homes before interest rates go even higher.

“Things will heat up over the next few months until we get to a tipping point,” Zillow economist Nicole Bachaud said expected this summer.

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THIS TIME IS DIFFERENT?

The correlation between home price growth and mortgage rates, while still strong, has been declining over the past 20 years, said Anne Thompson, an MIT associate professor and research scientist who recently co-authored a paper with Yale University’s Robert Shiller, explaining this rise argues Prices do not appear to reflect a bubble.

“I wouldn’t necessarily call it a slowdown, I would call it a flattening of appreciation rates, but not this year because rates are still relatively low,” Thompson said, noting that mortgage rates have historically been much higher.

Many regional markets remain very hot, particularly in the South, helped by greater flexibility for shoppers in terms of where they work, as well as strong wage increases amid labor shortages.

These factors can also boost home sales, even if higher interest rates take some of the steam off price increases.

Rob Lubow, 35, and his husband worked from their two-bedroom rental in Austin, Texas until late last year, when Lubow’s company began calling employees back into the office.

In January, Lubow began looking for a new job that would allow him to work from home permanently. A month later he had a – and a 35% raise.

Austin home prices had risen well past their maximum range of $300,000. The median home price in March was $624,000, up from $415,000 two years earlier, data from the Austin Board of Realtors shows.

Their remote jobs meant mobility, so last month they bought a three-bedroom house in Kingston, New York for just under their budget. According to Redfin, the average home price there is $280,000, up nearly 20% since last year.

“If people respond to higher housing costs by moving to more affordable places, that could lead to more home sales,” said Redfin chief economist Daryl Fairweather.

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‘CRAZY’

Record-low inventories in recent years also mean there’s plenty of pent-up demand, particularly among millennials ready to furnish their own homes, whose share of purchases is growing. But that’s hitting boomers, who are discouraged from downsizing by the rising cost of alternative housing, and staying and the larger homes desired by younger people at a time when too few new homes are being built, keep out of the market.

Meanwhile, data from Realtors Group shows the share of cash sales in March was the highest in nearly eight years, a sign offering being gobbled up by institutional investors or second-home buyers.

Mike Wang, 33, works for a vitamin company and rents an apartment in Los Angeles. He’s been promoted multiple times and now earns 50% more than three years ago. “Even if I’m making more money than I could have hoped to have when I was about 20, property prices have far exceeded that — which, when I think about it, I think holy cow, that’s crazy.”

So Wang says he sees no choice but to wait, hoping prices will slow as predicted and he can catch up enough to buy a home in a few years.

With so many people his age wanting to buy houses and so few houses being built, he’s not convinced that’s going to happen.

“Having been surprised in the past, I wouldn’t be surprised if things went against all analyst forecasts,” Wang said.

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Reporting by Ann Saphir and Lindsay Dunsmuir; Edited by Dan Burns and Andrea Ricci

Our standards: The Thomson Reuters Trust Principles.

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