WTF Is Going On In the Housing Market Right Now?

Hopes that the federal reserve would somehow make life easier for first-time homebuyers by making it harder for them to borrow money have run into reality: home prices are still rising, even as real estate transactions are decreasing.

When the federal reserve began raising interest rates nearly monthly over the past year, the intent was to cool inflation and drive down prices, including in the housing market. When it costs more to borrow money, fewer people buy property. And the Federal Reserve hoped that with fewer people buying property, demand would decrease, lowering prices. In reality, while sales are in fact decreasing, costs remain pretty high. Some analysts, including Goldman Sachs, predict they’re going to keep climbing.

According to a new report from the National Association of Realtors (NAR), the number of home sales has decreased by 15 percent from a year ago. And home prices grew 2.8 percent in that time, the third consecutive month that prices have increased compared to a year ago. The overall inventory of homes that have not been sold increased 2.7 percent over the prior month, but is down more than 8 percent from a year ago. This could mean that new houses being built or resold are not keeping up with the amount of buyers, even as the overall amount of transactions drop.

This may all just be a lag between home sales stalling and home prices eventually dropping. But National Association of Realtors’ chief economist Lawrence Yun expressed alarm that the Fed should shift its strategy. "The Federal Reserve simply cannot keep raising interest rates in light of softening inflation and weakening job gains,” Yun said in the report.

The biggest impact has been, predictably, on first-time homebuyers, whose share of transactions is near historical lows: accounting for just 27 percent of all home sales. NAR found that in November 2022, the share of annual first time homebuyers was 26 percent, the lowest it had ever been since it started tracking.

And all-cash sales, often a sign of housing speculation, accounted for 29 percent of all purchases in September, up from 22 percent a year earlier. Individual investors and second-time homebuyers were responsible for 18 percent of home purchases, up from 15 percent a year earlier. It makes sense that investors and speculators would have a slightly higher share of the market as mortgage costs get higher and people with up-front capital have an advantage. The 30-year fixed rate mortgage was about 7.8 percent as of this writing according to Freddie Mac, the highest it's been since 1997.

There are a few reasons home prices are not dropping and may not in the near future. One is that homeowners who borrowed years ago with low interest rates have no incentive to sell their property and move to another home. They may make a profit off the sale, but they’d be trapped in a much higher interest rate on the new home. 

That helps keep the overall inventory low. And while the country is building more homes than it has in decades, the overall inventory is still around 700,000 homes, according to the St. Louis Fed—double the record low of 353,000 from January 2022, but still below the 1.4 million on the market in 2016. And the vast majority of both single family homes and multifamily apartments being built are not being priced affordably, a result of decades of disinvestment from the federal government, high borrowing costs and supply-chain disruptions that have raised the cost of materials.

The average home sale price was close to $400,000 last month, according to St. Louis Fed,  and for first-time homebuyers the message is clear: the federal reserve is not coming to save you any time soon.