Back in March 2022, Fortune published an article with the headline "An economic shock just hit the housing market." The notion being that the Fed's inflation fight, which at the time of publishing had seen the average 30-year fixed mortgage rate jump to 4.5%, would create economic damage in the U.S. housing market. Of course, that's exactly what happened: The economic shock spurred by soaring mortgage rates, which topped out at 7.37% in October, pushed the U.S. housing market into a sharp housing recession. The second half of 2022 saw sales of both new and existing homes fall at a pace not seen since 2006.
But if we fast-forward to 2023, the story is again shifting. In recent weeks, the economic shock caused by spiked mortgage rates has weakened. The reason? As signs of decelerating inflation continue to mount, financial markets are loosening and mortgage rates are falling. Indeed, on Thursday the average 30-year fixed mortgage rate fell again to 5.99% following Fed Chair Jerome Powell's "disinflation" comments made one day earlier. That reading marks the first sub 6% mortgage rate since September 12, 2022.
"An improving inflation picture, which led to a smaller increase to the Federal Funds rate, has also led to lower mortgage rates. With the widespread consensus that inflation is on a downward trend, investors sent the yield on the 10-year Treasury lower. Mortgage rates tend to move with the yield on the 10-Year Treasury and the average rate on a 30-year fixed rate mortgage fell from a week ago and is at its lowest level since the second week of September. The drop in rates means that the typical monthly payment for a homebuyer has fallen by $100 since the beginning of January," wrote Lisa Sturtevant, chief economist at Bright MLS, in a statement published on Thursday.
Let's be clear: The U.S. housing market remains slumped. While the economic shock spurred by spiked mortgage rates has weakened, it's still very much here. And those elevated mortgage rates, combined with the Pandemic Housing Boom's 41% run-up in U.S. home prices, leaves affordability strained to a historic degree. Just look at the numbers. A borrower who took on a $500,000 mortgage in December 2021 at a 3.11% fixed rate, would've gotten a monthly principal and interest payment of $2,138. At a 5.99% rate (i.e. the average rate on Thursday), a borrower would get a $2,995 monthly payment on the same size loan.
Where will mortgage rates head from here? Real estate researchers remain divided. The Mortgage Bankers Association projects that the 30-year fixed mortgage rate will average 5.2% in 2023, , and down to 4.4% in 2024. Meanwhile, firms like Goldman Sachs and Moody's Analytics think 30-year fixed mortgage rates will average closer to 6.5%.
The North Texas housing market is downshifting quickly, with Dallas-Fort Worth being the only U.S. market to see a decrease in home sale prices last month, according to a report released today. DFW home prices are down 1.9% year over year in July, according to the latest Re/Max National Housing Report.
And what a difference a month makes. Last month, DFW led the U.S. for home price increases, with June prices up 29.3% over the previous year. In hard numbers, home sales prices in DFW fell to $413,900 in July from $422,000 in July 2021. Homes in DFW spend an average of 23 days on the market before selling.
Higher interest rates and inflation, as well as record home prices, triggered a sharp drop in demand for housing, said Todd Luong, a realtor with Re/Max DFW Associates: "Here at our Re/Max office in Dallas-Fort Worth, our listings are currently getting on average 2.7 showings per week," Luong said. "Last year, at this same time, our listings were earning on average 5.9 showings per week. That is a huge drop in buyer demand compared to the previous year. Record home prices and higher mortgage rates have forced many potential buyers out of the market, especially first-time homebuyers."
While the latest trends may disappoint some sellers, buyers now have more choices and better opportunities for good deals, Luong said. Luong said that the DFW housing market has been challenged with low inventory for years and reached an all-time low earlier this year, with only a two-week supply. Now, however, inventory is increasing. "Although buyers have more choices now, it is still not a balanced market as we only have about a two-month housing supply," Luong said. "In a normal market, you have about a five to six-month supply of housing."
A new report from Zillow also found falling home values, although the numbers didn't match Re/Max's precisely because of different study methods and different geographic definitions of DFW as a metro area, among other reasons. According to Zillow's findings, the Dallas-Fort Worth metro area's typical home value is $396,904, down 1.1% since June, the first month of decline. Values are up 55.4% since July 2019.
Zillow also reported that the mortgage payment on a typical home in DFW is $2,633 a month, including taxes and insurance. That's up 77.4% compared to July 2019.
According to Zillow, inventory in DFW has risen 10.2% since June, and the share of listings with a price cut in July was 22%, compared to 15.6% in June. Nationwide, after two years of unprecedented growth, home values fell for the first time since 2012 as competition for houses eased, according to Zillow's July market report.
The slowdown is being driven by decreased competition among buyers. Zillow's analysis says that affordability pressures have pushed many to the sidelines, and buyers are waiting in the wings to resume their search if and when prices relax a bit. Skylar Olsen, Zillow's chief economist, called the flattening of home values "a badly needed rebalancing. This slowdown is about discouraged buyers pulling back after the affordability shock from higher rates," Olsen said. "As prices soften, many will renew their interest, and we will continue our progress back to 'normal.'"
Luong said he sees positive signs in the market. The interest rate for a 30-year fixed mortgage dropped below 5% after peaking in June. More than 290,000 new jobs were added in Dallas-Fort Worth last year, so North Texas has one of the strongest labor markets in the country. "Reasonably priced homes that are in good condition and move-in ready are still selling very fast," he said. "However, the bidding wars have subsided considerably across the board."
Pending home sales declined in February for the fourth month in a row, as would-be buyers grapple with fewer, pricier homes to choose from and rising interest rates. Contract signings dropped by 4.1% last month from January and were down 5.4% year over year with all four regions in the U.S. seeing a decline, according to the latest data from the National Association of Realtors. "Pending transactions diminished in February mainly due to the low number of homes for sale," said Lawrence Yun, NAR's chief economist. "Buyer demand is still intense, but it's as simple as 'one cannot buy what is not for sale.'" Yun anticipates a 7% decline in home sales this year compared to last, and forecasts that rates will hover around 4.5% to 5% for the remainder of 2022. "It is still an extremely competitive market, but fast-changing conditions regarding affordability are ahead," he said. "Consequently, home sellers cannot simply bump up prices in the upcoming months, but need to assess the changing market conditions to attract buyers."
In recent days, investment bank after investment bank has published revised forecasts, and they all predict the same thing: That the Federal Reserve will raise interest rates at a quicker pace this year than anybody would have anticipated just a week ago. The latest is from Goldman Sachs, which now sees five rate hikes this year, joining Deutsche Bank at that number. Bank of America thinks the central bank will be even more aggressive. It predicts seven 25-basis-point hikes this year, one for each of the remaining FOMC meetings. That would bring the federal funds rate to 1.75%-2% by year-end, essentially hiking up borrowing costs for Americans after years of rock-bottom lending rates. At last week's meeting, Fed Chairman Jerome Powell gave a clear signal that the central bank will move to raise interest rates as often as needed to tame run-away inflation. "The striking thing about Chair Powell's press conference this week was that he in effect made a compelling case that the Fed should have already hiked rates in the second half of last year," said Ethan Harris, global economist at Bank of America, in noting tell-tale signs of a slowing economy, a turbulent labor market and rising prices. "The only thing missing from the narrative was: 'and so, we are behind the curve and are hiking today.'"