This has been a year of watershed moments in real estate, and not the good kind.
The Housing Market Index, a closely watched industry metric that gauges the outlook for home sales, declined to 33 in November on a hundred-point scale, its lowest level in a decade, save for the first dystopian month of the pandemic. Anything under 50 spells trouble.
A month earlier, interest rates on a standard 30-year mortgage passed 7 percent, capping the largest single-year increase in at least 50 years.
“Just to give you a sense of how far we’ve come, we started the year around 3 percent,” said Michael Fratantoni, chief economist at the Mortgage Bankers Association. “It has just been a wild ride.”
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The difference between a 3 percent interest rate and a 7 percent rate amounts to $1,000 more in a monthly mortgage payment on a mid-priced American home, according to Nadia Evangelou, senior economist at the National Association of Realtors.
Interest rates have retreated to 6.3 percent this month, seeding fresh hope for the few remaining buyers on a diminished housing market.
After an unprecedented campaign of rate hikes, Federal Reserve Chairman Jerome Powell has signaled that the central bank will ease up.
That’s one reason mortgage rates are ticking down. The other is more sobering.
“We, others, many market participants are forecasting a recession in the United States and many other places around the world,” Fratantoni said. “That puts downward pressure on the rates.”
The housing market is already in recession and has been since midsummer, according to the National Association of Home Builders, which publishes the Housing Market Index with Wells Fargo.
“The index has declined for 11 straight months,” said Robert Dietz, chief economist for the homebuilders group. “This is going to be the first calendar year in 11 years where single-family starts,” a measure of new home construction, “will total a smaller volume than the prior year.” He predicts a double-digit decline.
Where the housing market goes, the broader economy follows. Dietz, Fratantoni and others in the industry expect the nation to tip into recession, a state of economic malaise generally defined as two successive quarters of decline.
“The housing market leads the U.S. into recession, and it’s likely to pull it out,” Fratantoni said, with recovery arriving around the middle of next year.
And what does all this mean for homeowners?
For most: Staying put. The vast majority of homeowners are blessed with fixed-rate mortgages secured at historically low interest rates, under 4 percent. There’s little incentive to sell.
“Anybody with a fixed-rate mortgage who got their mortgage before the middle of this year is in really good shape,” Fratantoni said.
A small percentage of homeowners, around 1 in 10, may be in trouble. They hold adjustable-rate mortgages that will shortly adjust to current rates, if they haven’t already.
“Those people are gonna get hit,” said Steven Carvell, professor of finance at Cornell University.
In the years before the Great Recession of 2008, adjustable-rate mortgages made up as much as 35 percent of the home-lending market. When prices tumbled, many borrowers owed as much as their home was worth, if not more.
Economists expect no such meltdown in 2023. Nearly half of all current mortgages are “equity rich”: The borrowers owe less than half of what their home is worth, according to ATTOM, a real-estate analyst.
Things could get ugly if home prices plummet. But economists don’t expect that to happen in the current downturn.
“To be sure, we’re going to see an uptick in foreclosures,” Dietz said. “But we’re not expecting it anywhere on the scale of last time.”
More than 6 million families lost their homes to foreclosure in the Great Recession. That slump followed years of overbuilding, Dietz said, yielding a housing surplus and plummeting home values.
Recent years, by contrast, have seen “a tremendous amount of underbuilding,” he said, leaving a deficit of available housing.
Mortgage delinquency rates, a measure of looming foreclosures, stand at historic lows, Fratantoni said.
In the present housing recession, Fratantoni said, “if you have an owner who sees the market weakening, they just pull their property off the market.”
The Fed raised interest rates, in part, to seed a “correction” in an overheated housing market. Home prices rose more than 40 percent from the beginning of 2020 to June 2022, according to the Case-Shiller U.S. National Home Price Index.
It worked. The index has declined for three consecutive months, the steepest dip in a decade.
Home prices remain higher now than they were a year ago, but that could change. Redfin, the real estate brokerage, predicts prices will decline by 4 percent in 2023, to a median value of $368,000.
“This doesn’t necessarily mean that everyone’s home value is starting to decline,” said Daryl Fairweather, chief economist for Redfin. “Luxury homes will decline in price the most. Affordable homes will likely maintain their value a bit better.”
A Redfin analysis suggests home prices may hold up better in areas of the Midwest and Northeast where values rose less dramatically in the pandemic years. Prices could fall farther in pandemic boomtowns such as Phoenix; Austin, Texas; and Boise, Idaho.
Housing analysts expect a much steeper decline in home sales: a 15 percent drop in 2022 and a 7 percent decline in 2023, according to the National Association of Realtors.
“We saw a record share of houses being taken off the market in the last 12 weeks,” Fairweather said. Prospective sellers “are not willing to go down in price. They would rather keep the home and wait.”
For the nation’s real estate agents and home sellers, “last year was the best year since 2006,” Evangelou said.
This year is one of the worst.
Interview requests by The Hill to several prominent real estate agents on Monday went unanswered or were politely declined. One Chicago agent explained in an email that her sellers “are mostly waiting to list until next year.”
Buyers are suffering, too, buffeted by high interest rates, inflated asking prices and a vanishing inventory of homes for sale.
First-time homebuyers face particularly steep odds. They cannot tap a reservoir of equity to finance a large down payment. Rents have risen, complicating the task of saving any down payment.
First-time buyers now make up only 26 percent of all home purchasers, the lowest share in recent years, according to a national survey by the National Association of Realtors.
As 2022 turns to 2023, all eyes will be trained on interest rates. Many observers say the highest rates are yet to come.
“Our forecast has them peaking around 7 1/2 percent,” Dietz said.
But Redfin forecasts rates will eventually decline, sliding to 5.8 percent by the end of 2023.
At a 5.8 percent interest rate, a prospective buyer with a $2,500 monthly budget could afford a $406,250 home. At a 6.5 percent rate, the same buyer could spend only $383,750. Just a year ago, with a 3 percent rate, the buyer could spend $517,000.
And yet, for all the tumult unleashed by the recent rate hikes, a 6 or 7 percent interest rate is not particularly high, historically speaking.
“That’s not in the crazy range,” said Carvell of Cornell. “We’ve been in the crazy range. That’s the fact.”