Mortgage rates are rising, but the hot housing market is slow to cool

Gary Nelson is starting to see signs that the red-hot housing market is cooling off in Flagstaff, Arizona, like more buyers bowing out and houses taking a bit longer to sell.

The president of Arizona Realtors said the “double whammy” of soaring home prices and rising mortgage rates is a welcome shift after two years of fierce bidding wars and monster growth.

“We’re going to welcome a kind of plateau in activity,” Nelson said. “Perhaps things will slow a little bit. I’m hopeful that’s what we’re seeing.”

The Federal Reserve is expected to announce Wednesday the sharpest rate hike in more than two decades, a half-percentage point, as it races to slash in the highest inflation in 40 years and calm a housing market that’s been supercharged in the pandemic era.

The Fed’s plans to hike rates and draw down its vast balance sheet have already pushed the 30-year fixed-rate mortgage average above 5%, far above the 2.98% from a year ago. Pricier mortgages have led to some signs of a cooling market, even while the market remains mostly hot.

Near the end of April, mortgage purchase applications were down 17% from a year earlier, according to the Mortgage Bankers Association, a trade group. Sales prices have dropped in some 14% of homes in the last four weeks, up from 11% of homes with lower sales prices in March, according to Redfin data. Wells Fargo even laid off home-lending employees amid a drop-off in mortgage business.

Sales of existing homes fell 2.7% in March, the second-straight month of declines, according to the National Association of Realtors. And that shift is playing out all over the country. March sales fell in the Midwest (4.5%), the South (3%) and Northeast (2.9%) but held steady in the West, according to the group.

“If I were to pick one metric as a leading indicator, it’s really mortgage rates rising at their fastest pace in history,” said Taylor Marr, deputy chief economist at Redfin. “It’s one of the earliest signs the market is changing.”

A mortgage rate that jumps to 5.5%, from 3.5%, can add hundreds of dollars to a monthly house payment, narrowing the choices of homes people can afford.

Policymakers are especially worried about the price of housing because of its ability to drive inflation throughout the economy. For example, shelter accounts for roughly one-third of the basket of goods and services used to measure the consumer price index. If housing costs don’t slow down soon, it will be harder for overall inflation to simmer down to more normal levels.

For the past two years, the combination of low interest rates, stimulus aid from Congress, and people’s flexibility to choose where to live and work have boosted demand for the handful of homes available, sending home prices soaring. The average sale price of existing single-family homes rose 15.2% in March compared to the year before, according to NAR.

Real estate agents, buyers and housing experts are noticing a bit of a cooling, but they say the market is still churning. For example, it may be that a seller gets 10 offers instead of 20. But there’s still a long way to go before the housing market returns to normal, experts say.

Becky Enrico-Crum, president of Boise Regional Realtors, works seven days a week to meet the demand. And she isn’t expecting a slowdown anytime soon, because builders just can’t keep up. If no additional homes were listed for sale in the Boise area, the supply of homes would run out in approximately three weeks.

“People think, ‘How high can this go? Is it a bubble? Are we going to crash?’ ” Enrico-Crum said. “We really don’t have that, because it’s just back to simple supply and demand.”

In New York’s Hudson Valley home prices have seen some of the fastest growth in the nation as wealthier households relocate from New York City and scoop up the few homes available. Ryan Basten, a broker associate in Ulster County, New York, said he isn’t seeing a drop-off, especially as new transplants bring money to spend.

“In the past two months, interest rates have gone from 3.5% to 5.5%, which is a dramatic increase, and I don’t see that that’s affecting competition at all,” Basten said.

“If it gets to 6, 7 or 8 (%), then people may have a knee-jerk reaction to that, but I haven’t seen it yet,” Basten added.

But shifts on the opposite side of the country may start to tell a different story. In California, tours of for-sale homes dropped 21% by the end of March, compared to the first week of 2022, according to the home-tour technology company ShowingTime. That’s in contrast to the same period last year, when touring activity in California climbed more than 76%.

In Los Angeles and Orange County, the number of home buyers who applied for a mortgage dropped 18% in February compared to the year before, Redfin research shows. In San Francisco and San Diego, the drop was 13%. That was before the Fed enacted its first rate increase this year.

Even as the Fed tries to settle the housing market, its tools are limited. Rate hikes can’t build houses. Zoning rules and construction costs – boosted by supply chain issues and labor shortages – have made it more difficult for builders to meet the demand.

But the Fed may have more control over inflation in the housing market than in other parts of the economy. Russia’s invasion of Ukraine threatens to keep energy prices high for some time. Ongoing coronavirus-related shutdowns in China’s manufacturing hubs have ushered in a new wave of supply chain shortages that could also keep prices elevated for longer than expected.

Federal Reserve Chair Jerome Powell is expected to talk more about the uncertainty, and whether it could thwart efforts to curb inflation, on Wednesday at the conclusion of a two-day policy meeting.

In recent weeks, several policymakers have talked about rising housing costs as a top priority for relieving families’ burdens.

“As housing costs continue to increase, housing will likely become an ever-larger share of household budgets,” Fed Governor Christopher Waller said in a March speech. “I will be looking even more closely at real estate to judge the appropriate stance of monetary policy.”

Waller sold his house in St. Louis to an all-cash buyer with no inspection, and last month said, “I am trying to buy a house here in Washington (D.C.), and the market is crazy.”

There are parts of the country where housing costs have skyrocketed so much, it could be a long time before higher interest rates are able to ease the pain.

Redfin data revealed a stark example in Tampa, Florida, where home buyers need to earn $67,353 annually to afford the metro area’s typical monthly mortgage payment of $1,684. That’s up almost 48% from a year earlier, the biggest increase of any major U.S. metro area, according to Redfin.

In nearby St. Petersburg, Bob Jenkins is caught in the middle. He and his wife, Dianne, bought their three-bedroom, two-bathroom home almost 44 years ago for $54,000 and never seriously considered moving before. But lately, they’ve been bombarded with Zillow updates on the soaring value of their house, which hovers around $835,000. Bob Jenkins described it as “sitting on this pile of cash.”

They thought about selling the house and renting a spacious apartment, and hoped they wouldn’t have to pay much more than $1,900, which is around their monthly bill for the mortgage, insurance and property taxes. But with average rents in area climbing so much during the pandemic, they couldn’t find anything in that price range.

“In one way, we feel we ought to cash in,” Bob Jenkins said. “In another way, I say, ‘Where are we going to go?’ ”