Could Fed rate hikes cool the housing market?

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Gary Nelson is beginning to see signs of the red-hot housing market cooling in Flagstaff, Arizona, with more buyers dropping out and homes taking a little longer to sell.

The president of Arizona Realtors said the “double whammy” of rising 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 sort of plateau in activity,” Nelson said. “Maybe it’s going a little slower. I’m hopeful we’ll see that.”

The Federal Reserve is expected to announce its sharpest rate hike in more than two decades, half a percentage point, on Wednesday as it rushes to push back the highest inflation rate in 40 years and calm a housing market that is under pressure in the pandemic era.

The Fed’s plans to hike rates and scale down its massive balance sheet have already put pressure on the 30-year fixed-rate mortgage on average above 5 percent, far above the 2.98 percent from a year ago. More expensive mortgages have shown some signs of a cooling market, although the market remains mostly warm.

According to the Mortgage Bankers Association, a trade group, by the end of April, the number of mortgage purchase applications had fallen 17 percent from a year earlier. Selling prices have fallen in about 14 percent of homes in the past four weeks, compared to 11 percent of homes with lower selling prices in March. according to Redfin data. Wells Fargo even fired mortgage lenders because of a downturn in the mortgage market.

Rents are rising everywhere. See how much prices have increased in your area.

According to the National Association of Realtors, existing home sales fell 2.7 percent in March, the third month of declines. And that shift is happening across the country. March sales fell in the The Midwest (4.5 percent), the South (3 percent) and the Northeast (2.9 percent), but remained stable in the West, according to the group.

“If I had to pick one metric as a leading indicator, it would be mortgage rates that are rising at the fastest rate in history,” said Taylor Marr, deputy chief economist at Redfin. “It’s one of the first signs that the market is changing.”

A mortgage rate that jumps to 5.5 percent, from 3.5 percent, can add hundreds of dollars to a monthly home payment, limiting choices of houses that people can afford.

Policymakers are particularly concerned about housing prices because of its ability to drive inflation across the economy. For example, shelter accounts for about a third of the package of goods and services used to measure the consumer price index. If housing costs do not decrease quickly, it will become more difficult to bring overall inflation down to more normal levels.

Over the past two years, the combination of low interest rates, stimulus from Congress and the flexibility of people to choose where they want to live and work. ask for the handful of available homes, send house prices rise. The average sales price of existing single-family homes rose 15.2 percent in March from the previous year, according to NAR.

Brokers, buyers and housing experts are noticing a little cooling, but the market is still churning. For example, a seller may get 10 offers instead of 20. But there is still a long way to go before the housing market returns to normal, experts say.

Mortgage rates reach 5 percent, heralding new economic uncertainty

Becky Enrico-Crum, president of Boise Regional Realtors, in Idaho, works seven days a week to meet demand. And she’s not expect a slowdown soon as builders just can’t keep up. If there were no additional homes for sale in the Boise area, the stock of homes would run out in about three weeks.

“People think: how high can this go, is it a bubble? Are we going to crash?’ ‘ said Enrico-Crum. “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 experienced some of the fastest growth in the country as wealthier households move out of New York City and pick up the few available homes. Ryan Basten, a real estate agent in Ulster County, NY, said he doesn’t see a decline, especially as new transplants bring in money.

“Over the past two months, interest rates have risen from 3.5 percent to 5.5 percent, which is a dramatic increase, and I don’t see that affecting competition,” Basten said.

“When it becomes 6, 7 or 8” [percent]then people can have a reflex reaction to that, but I haven’t seen it yet,” added Basten.

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

In Los Angeles and Orange County, the number of homebuyers applying for a mortgage in February fell 18 percent from the previous year, according to research by Redfin. In San Francisco and San Diego, the decline was 13 percent. That was before the Fed made its first rate hike this year.

Even while the Fed tries to regulate the housing market, its tools are limited. Rate increases cannot build houses. Zoning rules and construction costs – driven by supply chain problems and labor shortages – have harder for builders to meet demand.

Some Fed officials wanted a bigger rate hike in March despite uncertainty

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

Federal Reserve chairman Jerome H. Powell is expected to talk more about the uncertainty and whether it could thwart efforts to contain inflation at the end of a two-day policy meeting Wednesday at the end of a two-day policy meeting.

In recent weeks, several policymakers have discussed rising housing costs as a top priority for easing the burden on families.

“As housing costs continue to rise, housing is likely to become an increasingly large part of the household budget,” Fed Governor Christopher J. Waller said in a March speech. “I’ll be taking a closer look at real estate to assess the right course of monetary policy.”

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

There are parts of the country where housing costs have risen so sharply that it could be a long time before higher interest rates can ease the pain.

Redfin data revealed a grim example in Tampa, where homebuyers must earn $67,353 annually to pay the typical monthly mortgage payment of $1,684 in the metropolis. That’s nearly 48 percent more than a year earlier, the largest increase of any major U.S. metropolitan area, according to Redfin.

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

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

“In a way, we think we should make money,” said Bob Jenkins. “In another way I say, ‘Where are we going?’ †

Kathy Orton contributed to this report.

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