housing market buyer seller rates difficult

Times are tough for the US home buyer, and not getting much better for sellers either.

With mortgage rates at an all-time, 20-year high, according to the Wall Street Journal, it’s no wonder why so many potential homeowners are finding themselves frustrated at every turn in this current market environment.

Of course, that’s not the only phenomenon troubling consumers of real estate or otherwise. Record levels of inflation plague major economies around the globe and monetary policy aimed at curbing the deleterious effects of this are, naturally, raising rates.

And as money becomes more expensive to borrow, so, too, do all other things denominated in it; namely, the pricing of homes, cars, consumer goods, services, and so forth.

This is in stark contrast to the boom years when rates were low and the economy was on relatively stable footing. Again, it is worth noting that inflation and a weak economy are global and not localized events; yet, the relative ease of access enjoyed by consumers in the years leading up to the present is certainly a feature specific to the United States.

To put things into perspective, it often helps to look at the numbers. When we say that things are at a twenty-year high, what does that mean?

Interest rates pummel the U.S. housing market

Take a look at the average rate offered by most mortgage lenders currently. The thirty-year fixed mortgage just crested 7% in many cases, compared to 3% just a year ago. That’s double the rate for a fixed-rate mortgage while an adjustable-rate mortgage can range anywhere above that number.

Recall the rule of 72 when it comes to looking at how rates can impact the balance of an account: At ten percent interest, it takes 7.2 years to double your money (or 72 divided by 10 yields 7.2 years). These rates are not only high, but they’re also somewhat devastatingly so and this is for thirty-year fixed-rate mortgages – sometimes considered the safest borrower group and some of the hardest to obtain.

All of this is placing sellers in the spotlight as well as they find it harder than ever to locate buyers whereas, before, the market couldn’t move fast enough. Many of these would-be sellers are now realizing that they perhaps missed out on the market gold rush but the real question is how long could they be made to suffer the consequences of their inaction?

Looking at this from a holistic perspective, consumers may be buoyed by a relatively stable situation right now, but the rising pressures of inflation and the unknowns on the horizon make nearly everyone less comfortable than before when it comes to committing to big purchases such as a home.

In Ben Eisen’s Wall Street Journal article, “Mortgage Rates Hit 6.92%, a 20-Year High,” he quotes Freddie Mac chief economist Sam Khater who notes, “We continue to see a tale of two economies in the data: strong job and wage growth are keeping consumers’ balance sheets positive, while lingering inflation, recession fears and housing affordability are driving housing demand down precipitously.”

Lack of capital affecting the 2022 housing market

Reports across the economy indicate that dealmaking is not only down in real estate, but also in corporate strategic mergers and acquisitions. Here, too, the problems are quite similar to those found in housing: A lack of capital combined with the rising cost of capital make huge deals, even at bargain basement prices, even riskier than before. In fact, these deals may be down a third year over year and are currently reaching levels not seen since 2008’s financial crisis.

Again, the reasoning here echoes that found in retail mortgage consumer sentiment.

Kristin Broughton writes, “During the third quarter, rising financing costs and uncertainty about the pace of future interest-rate hikes made companies skittish about moving forward with potential transactions. …Additionally, big swings in the stock market made it more difficult for companies to use their stock as currency, or get comfortable with a selling price.”

Pressures on consumers in other areas might be making the current environment difficult for would-be home buyers and sellers as well.

Lance Sonka, HousingMarket.com

Inflationary pressures have put renewed burdens on short-term debt instruments like credit cards. As more consumers rely upon their credit cards to make everyday purchases necessary for life, the cost of financing increases for them exponentially and further erodes their potential purchasing power when it comes to a home mortgage.

In other words, mortgages are not only more expensive because rates are higher, but the mortgages consumers can afford will be smaller because they are spending more money on the increased cost of goods and services.

Housing market entering a vicious cycle

It is a cycle that perpetuates itself in a vicious spiral and one that has helped initiate much of the paralysis in the current home market. Combine this with the rising trend of low supply in many booming markets and you have a situation in which consumers both cannot afford to buy a home because of rising mortgage rates and inflation, but also can’t build one themselves.

This goes without saying that developers, too, will be reluctant to start projects (as Kristin Broughton outlines in “More Companies Pause Deal-Making Amid Market Volatility, High Inflation”).

From a lender’s perspective, none of these trends make credit cheaper or less risky. JPMorgan CEO Jamie Dimon predicted a “hurricane” of economic events could be headed for the global markets and banks, as a result, need to prepare themselves to shoulder loan losses.

Although no one is predicting a financial crisis on par with 2008, thanks largely in part to more conservative behavior on the part of the banks themselves, these various factors combine to make the present and future outlook for homebuyers somewhat dreary.

Placing some numbers behind the CEO’s comments, mortgage originations at JPMorgan dropped 71% during the past three months and Wells Fargo reported that revenue from mortgage lending dropped by half during that same period.

To buoy the general thesis that there are myriad pressures facing consumer confidence right now, auto loan originations also dropped during the same time.

Lance Sonka

20 year building industry veteran helping home buyers build new construction homes in the Greater Houston area. Member of NAREE, NAHB and Publisher at HousingMarket.com, while currently serving on the...