The housing market is entering the ‘most significant contraction in activity since 2006,’ says Freddie Mac economist.
Cracks are beginning to appear in the red-hot housing market. The pandemic's housing boom is finally running on fumes. Home sales are falling. Inventory levels are rising. And home sellers are cutting list prices at the fastest clip since 2019.
Spiraling mortgage rates on top of record-high and still-rising home prices are leading many experts to predict the real estate market is on the verge of a correction—if it isn’t already in one. They anticipate home prices will flatten, or even go down a bit, in certain markets.
This Shift is a lot bigger than a seasonal cooldown. The economic shock of higher mortgage rates means borrowers are getting stretched thin to a degree unseen since 2006. That's why home shoppers in April and May finally balked at record home prices. This shift, Moody's Analytics chief economist Mark Zandi tells Fortune, is the start of a full-blown housing correction. Zandi predicts the year-over-year rate of U.S. home price growth will plummet from the all-time high of 20.6% to 0% by this time next year.
On Wednesday, we learned that U.S. purchase applications last week were 20.5% lower than the same week in 2021, according to the Mortgage Bankers Association. If you compare it to the height of the pandemic housing boom, purchase applications are down 40%.
On Thursday, Freddie Mac deputy chief economist Len Kiefer tweeted about what this downward shift means: "The U.S. housing market is at the beginning stages of the most significant contraction in activity since 2006."
At the start of 2022, the average 30-year mortgage rate was around 3%. Now, it's averaging 6.13%. That's an extremely drastic change in such a short period of time. And there's concern that rising mortgage rates will cause a huge amount of buyer pullback, sending home prices plunging.
In fact, mortgage application volume is half of what it was a year ago. And if rates keep climbing, home loan demand could decrease even more.
Here is a look at Sammamish, WA one of the hottest markets in the US over the past 2 years. In fact, residents on Sammamish are facing a 52% Property Tax increase over the previous year. The Sammamish Plateau Leads Washington State in Expected Property Tax Increase
Now just a couple months removed from bidding wars and homes going more than $500,000 over asking price, Sammamish has seen 45% of the homes listed in the city have a price drop sine June 1st.
This housing slowdown, of course, is by design. Earlier this year, financial markets, in response to Federal Reserve actions, priced up mortgage rates. That saw the average 30-year fixed mortgage rate spike from 3.11% in December to 6.13% as of June 13th 2022. In the eyes of the Fed, if it can slow down the housing market—a major driver of inflation—it can begin to rein in overall inflation.
This sharp contraction in mortgage applications is similar to the one that began in 2006. That, of course, turned out to be the onset of a housing slump that culminated in a nationwide housing bust in 2008. That said, Zandi doesn't think that's where we're headed. This time around, homeowners are in much better financial shape. Additionally, he says this historic run wasn't underpinned by a credit rush of bad mortgages like we saw in the early 2000s.
Logan Mohtashami, lead analyst at HousingWire, was publicly pushing for higher mortgage rates heading into 2022. The view being that "the savagely unhealthy" housing market needed to be cooled in order for inventory to rise. The historically low levels of inventory reached during the pandemic gave homebuyers little choice but to bid up prices. If we're going to return to a healthy housing market, Mohtashami predicts we'd need to see national inventory rise to a range between 1.52 million to 1.93 million units. The National Association of Realtors’ latest reading has inventory at just 1.03 million units.
"My concern in the future is if the rates fall again, some of the inventory gains we had will go away,” Mohtashami tells Fortune.
Parts of this story was originally featured on Fortune.com