Most experts agree that the robust housing market since 2016 came to a sliding stop in early 2022. However, they use various levels of sugar-coating in their statements. It happened subtly but firmly. By October 2022 end the number of homes sold had dropped by about 30%, compared to one year ago, according to the National Association of Realtors. The main factor to cause this was a steep and rapid increase in mortgage lending rates. These rates are currently at a 20-year high level.
Mortgage rates and the housing market
There is a direct correlation. Entry-level and first-time home buyers are the backbone of our housing market. This housing market segment is the lifeblood of vertical mobility and is most vulnerable to mortgage lending rates. Due to current mortgage rates, most buyers in this segment have been priced out of the market. Simply put, the crucial component of the housing market’s vertical movement has been taken out of play. Of course, there are other ancillary factors at play as well.
According to the S&P CoreLogic Case-Shiller National Home Price Index, home prices soared 45% between January 2020 and June 2022. This significant increase was primarily due to rock-bottom interest rates. The entry-level buyer pool had swelled up, creating opportunities for mid to high-level buyers to move up.
A housing market of contradictions
This real estate market is full of contradictions. House prices have fallen yet remain well above their pre-pandemic levels. Mortgage lending rates are sky-high compared to a year ago but remain below the previous highs. Existing home sales have fallen for the past nine months. We see a reduction in some home prices, but nowhere near sufficient to offset the cost of rising interest rates. Entry-level buyers are leaning more towards renting as the rental market is also slowing down.
Home sellers will have to embrace the new reality, remove the minimal inventory premium from the equation when listing their homes, and start pricing their properties. They will also need to offer an enticement to buyers who are getting crushed by these sky-high lending rates. We have begun to see some of that. More is necessary for home buyers to rush back into the market.
Strategies for savvy home buyers
Most housing market indicators confirm that we are in a transitional phase. Mortgage lending rates are likely to slide back a little and then stabilize. The current market adjustment is not a temporary phase. The home prices should be stable with modest annual gains for the next three to five years. Traditionally more robust markets will enjoy modest gains determined by supply and demand realities. Traditionally weaker markets will lag.
Savvy home buyers recognize that all real estate is local. For example, home prices in the greater Seattle area have been mostly unaffected, depending on the price point.
Having a home is a life necessity first and an investment second. If your circumstances permit, wait a couple of months before committing to your life’s most significant purchase. Let the critical economic indicator become more explicit, and then act accordingly.
It has always been crucial to figure out your finances before entering a home purchase and sale contract. It has become even more critical now. Protect yourself against financial hardships, emotional stress, and lost opportunities by fully understanding your financial capabilities and limitations.
Hire a seasoned, prudent real estate broker with expertise in the local real estate market, top-notch negotiation skills, and a comprehensive grasp of the nuances of the real estate purchase and sale process. Take full advantage of Washington state law’s extensive protections for home buyers. Make sure you are fully satisfied with house inspections and that all your inquiries have been answered satisfactorily before finalizing the sale.
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