Higher Mortgage Rates Begin To Cool the Pricey Housing Market
|With 30-year fixed mortgage rates topping 5% recently, homebuyers appear to be reevaluating their budgets and pulling back on offers.
The reservations come as home prices continue to climb to new record levels. The median price of an existing single-family home, for example, grew to $382,000 in March, up 15.2% over the year, according to the National Association of Realtors. Meanwhile, the U.S. Census Bureau reported that the median price of a new single-family home reached $436,700 in March, up 21.4% over the year, and according to the S&P/Case-Shiller Home Price Index, which accounts for same-property transactions that closed from December 2021 to February 2022, it grew by 19.8% over the year.
While a shortage of supply has propelled home prices, inventory ticked up last month. At the end of March, roughly 830,000 single-family housing units were on the market, according to the National Association of Realtors, up from 740,000 the prior month. That marked a series low going back to 1982.
Rising inventories at a time of declining sales counts suggest that more prospective homebuyers are losing interest. NAR reported that existing single-family home sales fell by 2.7% in March, while the Census Bureau reported that new single-family home sales unexpectedly tumbled by 8.6%.
The lack of home affordability is the primary deterrent for many households. Nominal incomes have been rising at their fastest pace in decades, but inflation is cutting into the gains by making many goods and services more expensive. NAR’s housing affordability index, which measures the ability for a typical family to qualify for a mortgage of a typical home, fell in February — the latest available reading — to its lowest level since August of 2008. The index uses the average mortgage rate paid for sales that month, which NAR reports was 3.83% in February.
However, many of those mortgage rates were locked in late January. A prospective homebuyer is now seeing mortgage rates that are significantly higher. The Mortgage Bankers Association reported that the average mortgage rate reached 5.2% during the week ending April 15, compared to 4.06% during the same week in February and 3.64% during the same week in January.
It comes as no surprise, then, to see a pullback in homebuying activity. Mortgage applications for purchase during the week ending April 15 — the latest reading — fell by 3% from the previous week and were 14% lower than in the same week of 2021, according to the Mortgage Bankers Association.
A robust construction pipeline should provide a boost to inventories, but builders continue to face challenges in completing construction. The Census Bureau reports that single-family housing starts during the first quarter of 2022 grew by 3.9% over the same period in 2021. As housing starts tend to lead completions by about six months in the single-family sector, completions could presumably grow to a pace that’s about 200,000 units higher by the third quarter of the year.
More Supply Is on the Way for Now
Multifamily housing starts are on an even faster trajectory relative to their recent completions. In the first quarter of 2022, starts in developments with five or more units grew by 26.3% over the same period in 2021. These buildings take longer to complete, so the lead time of multifamily housing starts to completions is about 11 months, meaning completions in this sector are on track to grow by a pace that will add 125,000 units to the market by early next year.
However, the pace of construction could waver as the year progresses. Some homebuilders have expressed concern that rising material costs will be more difficult to pass on to homebuyers now that mortgage rates are spiking higher. The homebuilder confidence index measured by the National Association of Home Builders fell to 77 in April, a seven-year low, from 79 in March and 83 in April 2021. Most notably, traffic of potential buyers dropped sharply over the past month as mortgage rates spiked. The index is still higher than 50, which signals continued homebuilder optimism, but builders might be wary of cooling demand in this environment of higher home prices and deteriorating affordability and push off plans for new developments until the market stabilizes.
What We’re Watching …
On Thursday, the Commerce Department plans to release its advance estimate of economic growth in the first quarter. Expectations are for this number to be a significant drop-off from the fourth-quarter final reading of 6.9%, which had been boosted by strong inventory growth. The first quarter of 2022 will likely come in far slower as the economy faces continued supply chain issues, inventory drawdowns and the impacts of Russia’s invasion of Ukraine. An updated inflation reading is set to arrive on Friday with the personal consumption expenditure price index for March, which is expected to tick higher.
CoStar Economy is produced weekly by Christine Cooper, managing director and chief U.S. economist, and Rafael De Anda , associate director of CoStar Market Analytics in Los Angeles.