Times are tough for the U.S. home buyer and not much better for sellers.
With mortgage rates at an all-time 20-year high, according to the Wall Street Journal, it’s no wonder why many potential homeowners are frustrated at every turn in this current market environment.
Of course, that’s not the only phenomenon troubling real estate consumers or otherwise. Record inflation levels plague significant economies around the globe, and monetary policy aimed at curbing the harmful 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, etc.
This starkly contrasts with 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 consumers enjoy in the years leading up to the present is undoubtedly a feature specific to the United States.
To put things into perspective, it often helps to look at the numbers. What does that mean When we say things are at a twenty-year high?
Interest rates pummel the U.S. housing market.
Take a look at the average rate offered by most mortgage lenders currently. In many cases, the thirty-year fixed mortgage just crested 7% 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 1 percent 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.
This also places sellers in the spotlight, as they find it more challenging than ever to locate buyers, whereas, before, the market couldn’t move fast enough. Many of these would-be sellers now realize they 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 current situation. However, the rising pressures of inflation and the unknowns on the horizon make nearly everyone less comfortable than before when 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 down in real estate and corporate strategic mergers and acquisitions. Here, the problems are similar to those found in housing: A lack of capital combined with the rising cost of capital makes huge deals, even at bargain basement prices, even riskier than before. 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.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 exponentially and further erodes their potential purchasing power regarding a home mortgage.
In other words, mortgages are more expensive because rates are higher, but the mortgages consumers can afford will be smaller because they spend more money on the increased cost of goods and services.
The housing market is entering a vicious cycle.
It is a cycle that perpetuates itself in a vicious spiral and 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 cannot afford to buy a home because of rising mortgage rates and inflation and can’t build one themselves.
Developers will be reluctant to start projects (as Kristin Broughton outlines in “More Companies Pause Dealmaking 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 that a “hurricane” of economic events could be headed for the global markets, and banks, as a result, must prepare themselves to shoulder loan losses.
Although no one is predicting a financial crisis on par with 2008, thanks mainly in part to the more conservative behavior 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. Wells Fargo reported that revenue from mortgage lending fell by half during that 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.