Today’s real estate market is a toxic mix of high mortgage rates, high prices, tight supply, and strangely strong pent-up demand—and it’s deterring buyers and sellers alike.

Prices were already high due to soaring demand during the peak of the Covid-19 pandemic. Now the popular 30-year fixed mortgage rate is at 8%, the highest in decades, making things even more difficult. Mortgage demand is at its lowest level in nearly 30 years.

“I find it painful. I think it’s ugly,” Matthew Graham, chief operating officer at Mortgage News Daily, said on CNBC’s “The Exchange” Thursday.

During the first two years of the Covid-19 pandemic, the Federal Reserve cut its key interest rate to zero and invested money in mortgage-backed securities. The result was record low mortgage rates for two solid years. That sparked a buying frenzy that was also fueled by a sudden urban exodus and the new work-from-home culture. Property prices rose 40% from pre-pandemic levels.

Then, as inflation rose, the Fed raised interest rates. Ironically, this made the real estate market even more expensive. Typically, property prices fall when interest rates rise.

However, this market differs from the historical ones as there is also a serious lack of supply. The Great Recession of 2008 and the subsequent foreclosure crisis hit homebuilders particularly hard, leaving them unable to build enough for over a decade. They still haven’t made up the difference.

Who is harmed by the current real estate market?

Meanwhile, would-be sellers are trapped. You have little desire to trade the current interest rate of 3% for a mortgage interest rate of 8% for a new purchase.

“I don’t think anyone in my community of mortgage lenders would disagree that this is in many ways worse than the Great Financial Crisis in terms of volume and activity,” said MND’s Graham.

He is also not sure when the market will see a decline in interest rates. “But we are hearing a chorus of Fed speakers, particularly last week, in a very notable way, saying that they are hawkish and that they can wait and see what happens as policy impacts the economy,” he said.

Condominium sales fell at their slowest pace since October 2010 in September, according to the National Association of Realtors. However, there are major differences between today’s market and the period of the foreclosure crisis. The number of foreclosures today is extremely low and most current homeowners have historically high home equity. The fact that so many refinanced at record-low interest rates between 2020 and 2022 also means that current homeowners have very affordable housing costs.

So that also leaves potential buyers stuck.

“I think people are worried and there’s a strong buyer mentality: ‘We’ll wait and see.’” “A lot of people just want to wait and see what happens,” said Lisa Resch, a real estate agent with Compass in Washington, DC

The NAR is now lowering its 2023 revenue forecast to a decline of up to 20%, after previously forecasting a decline of 13%.

What’s next for real estate prices?

Prices are another story.

“From this point on, prices are expected to remain stagnant at 8% despite the housing shortage,” added Lawrence Yun, NAR chief economist.

However, Yun noted that metropolitan markets with faster job growth and relatively affordable prices will see an increase in sales. He points to Florida markets such as Tampa, Jacksonville and Orlando, as well as Houston, Texas and Memphis, Tennessee.

Buyers today are likely to get the best deals from home builders, especially large production builders like Lennar and DR Horton. Developers contribute to affordability by offering lower interest rates to their customers. This is something they have not typically done in the past – at least not to this extent.

“Although our mortgage lender has offered loans at slightly below-market interest rates for most of this cycle (simply to be competitive), the full point buyback for the 30-year term of the loan, which we recently referred to as a construction incentive, is not that “Something we have done in previous cycles, at least not on the broad majority basis that we do today,” said a spokesman for DR Horton. “It may have been found in extremely limited quantities in select homes in the past.”

What about the housing supply problem?

The construction of single-family homes is slowly increasing, but cannot yet come close to meeting demand. Builder sentiment is falling further into negative territory due to higher interest rates, but the market for new homes is still more active than the market for existing homes.

On the bright side, apartment rents are finally cooling off thanks to a record amount of new listings coming onto the market. This gives tenants less incentive to buy. However, the demand for rental properties is increasing.

“It appears that slowing inflation and a still-strong labor market are boosting consumer confidence and, in turn, stimulating household formation among young adults who would be most likely to rent,” said Jay Parsons, chief economist at RealPage.

Anyone who still wants to upgrade to a larger house or downsize to a smaller one is faced with a conundrum.

Due to the imbalance between supply and demand, prices are still rising, but sellers are more flexible. So a buyer could buy now at the higher rates and hope for a discount, or they could wait until the rates go down.

However, if this is the case, there will likely be a flood of demand that will lead to bidding wars.

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