Lack of affordability continues to hold down housing market

WASHINGTON (TND) — The housing market is continuing to slide under the weight of increased interest rates and bloated home prices have pushed many people out of the market.

Existing home sales declined for a 10th consecutive month in November, the National Association of Realtors said Wednesday. Sales dropped 7.7% last month from October and 35.4% from 2021.

This year has brought on a rapid decline in the housing market as the Federal Reserve has aggressively hiked its benchmark interest rate in a bid to tame inflation. Interest rates for a mortgage were more than double what they were in January earlier this month and have only slightly come down.

The average rate on a 30-year mortgage has declined for six consecutive weeks but still sat at 6.27% as of Thursday, according to Freddie Mac. Rates on 15-year mortgages are also still nearly double what they were in January.

Mortgage rates do not directly track the Fed’s benchmark rate but are influenced by it. Instead, they tend to track the yield on 10-year Treasury notes, which are influenced by demand for U.S. Treasurys and investor expectations.

“In essence, the residential real estate market was frozen in November, resembling the sales activity seen during the COVID-19 economic lockdowns in 2020,” said NAR chief economist Lawrence Yun. “The principal factor was the rapid increase in mortgage rates, which hurt housing affordability and reduced incentives for homeowners to list their homes. Plus, available housing inventory remains near historic lows.”

Housing inventory is continuing to add to the pricing pinch brought on by increased rates, which make mortgage payments cost hundreds more each month. Total housing inventory in the U.S. was 1.14 million units at the end of November, down 6.6% from October and a modest increase of 2.7% from a year ago.

Part of the issue with low inventory is a “lock-in effect,” where current homeowners are locked into a much lower rate from purchasing or refinancing during the pandemic rush. Instead of looking to upgrade or move to a better area, potential homebuyers who already own are staying in their current places and locked into lower rates.

Further adding to the issues inventory is wariness from homebuilders who are seeing declining interest and uncertainties about the economy’s future, leading to fewer projects getting started.

The Census Bureau said Tuesday that new housing permits were down 22% in November from a year ago. Housing starts were down more than 16%.

Builders are dealing with increased costs and sagging confidence in the economy that some economists and financial firms are expecting to tilt into a recession next year.

An index by the National Association of Home Builders that measures confidence has declined every month in 2022. NAHB chairman Jerry Konter said builders are struggling to keep housing affordable for buyers with high inflation and mortgage rates. There is some indication that things could start to look more promising for builders.

“The silver lining in this HMI report is that it is the smallest drop in the index in the past six months, indicating that we are possibly nearing the bottom of the cycle for builder sentiment,” said NAHB chief economist Robert Dietz. “Mortgage rates are down from above 7% in recent weeks to about 6.3% today, and for the first time since April, builders registered an increase in future sales expectations.”

There are also some expectations that the housing market could begin to recover later in 2023 even with an economic downturn to start the year.

“The latest data on the housing market show that homebuilders are pulling back the pace of new construction in response to low levels of traffic, and we expect this weakness in demand will persist in 2023, as the U.S. is likely to enter a recession,” said Mike Fratantoni, Mortgage Bankers Association chief economist. “However, if mortgage rates continue to trend down, as we are forecasting, more buyers are likely to return to the market later in the year, as affordability improves with both lower rates and slower home-price growth.”