The once raging property market is cooling off at the same pace as mortgage rates are rising. Although home prices remain historically high, there are worries that they may begin to decline. All of this has led to the obvious question: Is today’s housing market in the same dilemma as it was over a decade ago when the Great Recession was triggered by the 2007-08 crash?
No, is the quick response. Today, the housing market in the U.S. is in much better shape. This is partly due to tighter lending laws enacted after the financial crisis. The average borrower’s FICO credit score for the 53.5 million first-lien home mortgages in modern America is at a record-high 751. In 2010, two years after the mortgage crisis and subsequent bailouts, it was 699.
However, a record 79% of respondents in a Fannie Mae study on homebuyer mood indicated that now is a terrible time to buy a home. Although the market is still quite strong by historical standards, there are already critical concerns, and there are several credible reasons to assume that the tide is shifting.
What exactly are the reasons behind today’s housing market crisis? What should prospective home-buyers and home-sellers keep in mind?
Part of the reason there are more listings is that more homeowners are electing to sell, in addition to the high costs forcing prospective buyers out of the market. According to Realtor.com, more new listings were added to the market in May than in any previous month since June 2019.
If you’ve been looking at houses, you might have seen something you haven’t seen for a while: price reductions. Homes used to sell so rapidly and often in bidding battles that sellers would often get much more than they sought initially. However, since buyers face affordability issues and less competition to buy, certain sellers are lowering their prices. According to Realtor.com, price reductions were reported in 10.5% of houses in May, up from 6.2% in May 2021.
Real estate businesses also declare layoffs as the home market becomes less active. This week, Redfin announced the firing of around 8% of its workers, while Compass announced a 10% reduction in its employment. According to Redfin CEO Glenn Kelman, the need for Redfin’s services in May was 17% lower than expected. As a result, there isn’t enough work for the company’s agents and support workers.
According to a business statement, 450 of Compass’s 4,500 employees will be laid off “due to the clear signals of slowing economic growth.” Other real estate industry contractions have followed these layoffs as the once-hot housing market has begun to cool.
As loan rates have risen, fewer people are applying for mortgages. According to the Mortgage Bankers Association, mortgage purchase applications were down 16% from a year ago in the week ending June 10th. Joel Kan, MBA’s associate VP of economic and industry forecasting, stated, “Purchase applications were down compared to last year, as ongoing inventory shortages and affordability challenges have cooled demand, coinciding with a rapid jump in mortgage rates.” With mortgage rates well above 5%, brisk refinancing activity has dried up, with refinance activity running more than 70% lower than last year.
According to the MBA, loan availability is far lower than before the pandemic, indicating that criteria are still stringent. However, since interest rates began to rise, lenders have lost nearly half of their revenue, which might mean they have become more aggressive in lending to less credit-worthy consumers.
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Fewer individuals appear to be looking for homes now, with excessive prices and loan rates only continuing to increase. During the week ending June 12th, a Redfin index that measures homebuyer demand – by tracking requests for property tours and other home-buying services from agents – was down 14% year-over-year. This was the eighth week of decreases in a row.
According to real estate analysis firm Black Knight, the largest issue in the housing market right now is home affordability, which is at an all-time low in at least 44 major areas. While inventory is beginning to grow, it is still less than half of what it was before the pandemic. Danielle Hale, Realtor.com’s chief economist, said, “Rising inventory will eventually cool home price growth, but the double-digit pace has shown remarkable sticking power so far. As higher housing costs begin to max out some buyers’ budgets, those who remain in the market can look forward to relatively less competitive conditions later in the year.”