High interest rates kept our home sales in a deep freeze for much of last year. It could be a while before the market experiences much thaw.
Americans bought more than 4 million previously owned properties last year, the National Association of Realtors said Friday. That was the lowest number since 1995 and well below the typical annual pace of about 5 million before the coronavirus pandemic.
Sales rose slightly at the end of the year, increasing 9.3% in December from a year ago. This increase likely reflects lower mortgage rates over the summer and early fall, which averaged about 6% for 30-year fixed-rate mortgages. This made the house more affordable for buyers.
However, mortgage rates have rebounded to around 7% and most forecasters don’t expect much in the coming months. Charlie Dougherty, an economist at Wells Fargo, said this year is unlikely to result in a significant increase in home sales.
“You’ve seen sales start to pick up a little bit, but it’s still slow,” he said. “I don’t think it’s indicative of a really strong or energetic recovery that’s coming.”
Home prices have soared during the pandemic as Americans want more space and rock-bottom interest rates have made it easier to borrow. Real estate agents spoke of a frenzied bidding war as buyers competed for available homes.
That madness came to an abrupt halt when inflation rose rapidly, leading the Federal Reserve to raise interest rates to their highest levels in decades. Interest rates on 30-year fixed-rate mortgages have jumped from less than 3% in late 2021 to nearly 8% two years later.
The combination of high prices and high interest rates has made the homes unaffordable for many people. And many of them were owners who had bought homes or remortgaged them when rates were low and had little incentive to sell. This led to low inventory and high prices.
There are hints that the housing market may gradually return to normal as life events – new jobs, new babies, marriages, divorces – force sales and buyers adjust to higher borrowing costs. Inventory is being knitted, and surveys indicate more owners plan to sell.
But that regularization process is likely to be slow unless mortgage rates come down, Dougherty said.
“I think it’s fair to say that home sales has found its floor,” he said. However, he added, “If you look at the overall level, it is still very weak.”
