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Home buyers get spooked when mortgage rates pass 5.5%

By Mike Simonsen on October 3, 2022

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Mike Simonsen

A true data geek, Mike founded Altos Research in 2006 to bring data and insight on the U.S. housing market to those who need it most. The company now serves the largest Wall Street investment firms, banks, and tens of thousands of real estate professionals around the country.

Home buyers have stopped cold as mortgage rates spiked dramatically in the last few weeks. It’s really measurable. In this week’s update, I’ll show you the inflection point during the first week of September, which was precisely when mortgage rates spiked up over 5.5% to 6.5 and almost 7% for the 30 year fixed mortgage. These are historically big swings, and buyers know it.

Sellers know it too, and aren’t flooding the market with homes. There are fewer new listings each week and still inventory is climbing. This is a rapidly changing market and we’ll take a look at all the things we can see changing right now.

Every week Altos Research tracks every home for sale in the country. We analyze all the pricing, supply and demand, and all the changes in that data and we make it available to you before you see it in the traditional channels. If you aren’t using Altos market reports with your clients, your buyers and sellers, now might be the time to step up. Go to AltosResearch.com and book a free consult with our team. Because everyone is worried about what’s happening right now. They need you to help them see clearly.

I’m Mike Simonsen, I’m the CEO of Altos Research. Here’s what the data looks like for the week of October 3, 2022.


Real Estate Inventory


We’re going to start this week with the yearly inventory chart and the projection of inventory for the rest of the year. There are 561,000 single family homes available unsold on the market. That’s up just under 1% for the third week in a row. Prior to September 1 inventory had plateaued and had been creeping down. This corresponded with mortgage rates being close to 5% for August. So it looks to me like 5.5% is the big threshold for buyers.

I’m going to keep an eye on that threshold. If rates are in the 7% range when we start next year, that’s going to wreak havoc on any forecasts we’ve been thinking about. 7% is way higher than I would have guessed any time this year. I don’t have any capacity to predict where rates will actually be. Don’t know if they’ll go up or down from here. So we’ll just have to watch and see the impact. See if that 5.5% mortgage rate is a repeatable threshold.

It’s not just the buyers of course. The biggest factor overshadowing this whole market is that sellers don’t have to sell. New listings volume is down again this week. We have fewer new listings than usual for this time of year, yet inventory is climbing. That says so much. It’s a buyer freeze out. Since Americans are locked into their ultra cheap mortgages, and everyone has a job right now, there’s really no catalyst for the new listings volume to climb. This should follow its normal seasonal curve lower through the end of the year. Next year, if recession hits deep and people lose their jobs, this variable would change. But that’s not until next year. Right now only people who really really need to sell would list their homes. These are things like big life transitions that mean it’s time to move. And you can even imagine that some big life transitions get delayed because people don’t want to sell a house in this environment.

So all our inventory build is coming because buyers stopped cold. Not because sellers are panicking.

Immediate Sales


You can see it in our immediate sales tracker. During the pandemic the defining characteristic of that housing boom was this phenomenon of immediate sales. Homes getting listed, taking offers within hours or days and going into contract essentially immediately. Just 12,000 immediate sales this week. Dramatically fewer than even a week ago.

I’ve been expecting this slowdown in immediate sales all summer. I’ve been surprised as buyers kept doing their thing. It’s finally here and it took rates jumping over 5.5%.

Home Prices

 

Home prices declined by just under 1% this week. That’s partly seasonal and partly the cycle now being negative. Even if we weren’t in this crazy turmoil of mortgage rates and economic uncertainty, home sellers would still discount each week until the end of the year. I expect the median home price to be about $410,000 by the end of the year.

You can see this in local markets too. For example in the Dallas metro home prices usually tick back about 10% from the June peak to the winter lows. This year, home prices have already receded by 10% in the Dallas area and have more to go before the lows of the season. In other words, both seasonal and cyclical trends are happening. In Dallas almost all of the seasonal downs evaporated during the pandemic so we’re back to normal seasonal trends there.

Next year then the upslope in the spring has a lot of headwinds. If rates stay over 5.5%, we are facing recession likely for next year, and we’ll have year over year inventory gains. More supply in the face of the dramatically slowed demand. These are all really bearish signals for home prices in 2023. The only mitigating factor is that we still have a shortage of homes for sale. Going to be fascinating to see how far inventory grows when people inevitably lose their jobs in the next recession. That inventory is still a year or two out in the future.

This year you can see the upslope of home prices in the first few months of the year, it was dramatic and steep. That’s not going to happen next spring, the price chart will be really interesting in January to see how 2023 sets up. And we’ll keep watching here to see if home prices recede below $400,000 median for single family homes before the end of the year.

Home Price Reductions


And like our inventory chart you can see the inflection point in price reductions too when rates jumped above 5.5% around September first. Price reductions had leveled off in August. Buyers and sellers were doing their thing. But then in September we had a re-acceleration of price cuts. This week 41.6% of the homes on the market now have had price cuts in the last few months. There are two aspects here to consider - how many total and how many new per week, the slope here. Like with inventory, it’s normal for price reductions to peak in October. The market has much less activity over the winter, fewer homes, some are withdrawn, that curve peaks in October and starts falling through next spring.

But the steepness of the curve is pretty dramatic. Last week 41.2%, now 41.6% of the market has had a price cut. That’s a lot of homes to cut their prices in late September. A few weeks ago the curve was much flatter. Sellers still on the market are looking for any signs of attention. I’ve been using 45% with price reductions as a rule of thumb to be even more bearish for home prices in 2023. In the local markets like Phoenix and Austin, we’re over 60% with price reductions. Previous home prices are not sustainable in these areas when buyer demand is so cold.

There are a lot of global macro variables that are driving this market. I wish I had the ability to know where mortgage rates are in January. Or whether the world has tamed inflation or whether Ukraine emerges victorious in the war. These are way outside my vision. But what we can do is watch the market in real time. We can start to see that 5.5% on the 30-year mortgage may be the threshold beyond which consumers are frozen out of affordability. We’ll see if that observation holds up in the next few months.

If you’re watching the video and saying to yourself, Mike the national data is fine, but my town is different. That’s probably true. Go to AltosResearch.com and book a free consultation with our team. Dive into your local market and make sure you know the data for your clients right now.

OK that’s all for this week, more next week.

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