Rapidly rising mortgage rates may help to reduce housing demand this spring, as the worsening affordability causes more buyers to be priced out of the market, experts say.
Mortgage applications are already down more than 6%, according to a report by Redfin. That suggests sellers may have to be more realistic when setting their asking prices, something that may be a shock considering market conditions over the past few years. However, that seems to be the trend, as there are growing reports of listings reducing their asking prices. Indeed, Redfin said listing price reductions have grown at their fastest pace since 2015. However, just 3.2% of home for sale listings have currently seen price drops, suggesting sellers remain firmly in control.
Redfin Chief Economist Daryl Fairweather said the data suggests that there are still limits to homebuyer demand, even though it has seemed endless in the past few years.
“The sharp increase in mortgage rates is pushing more home buyers out of the market, but it also appears to be discouraging some homeowners from selling,” Fairweather said. “With demand and supply both slipping, the market isn’t likely to flip from a seller’s market to a buyer’s market any time soon.”
The rising mortgage rates were cited by the National Association of Realtors as the main reason why it is forecasting a 10% drop in home sales in 2022. The NAR says rising rates are pricing out more and more would-be buyers. However, it still expects home prices to rise by up to 5% this year.
For first-time home buyers, the cost of buying the same home this year compared to just one year ago has jumped by 40% – a combined impact of higher home prices and mortgage rates.
“There will be an inevitable slowdown in home sales,” Lawrence Yun, the NAR’s chief economist, recently said in a statement. “Keep an eye on days-on-market and a decrease in multiple offers. Home sellers should not expect big, easy profit gains.”
That said, the housing market remains a red hot one even as signs of cooling make their presence felt. Homes are selling faster than ever before, and price escalations and bidding wars are still commonplace, Redfin reported. In the last month, 45% of homes that went under contract did so within one week, with the average home selling for 2.4% above its listing price, Redfin said.
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