By Prashant Gopal | Bloomberg
For a brief moment, it looked like US homebuyers would finally catch a break.
The housing market was beginning to thaw as mortgage rates fell in September to a two-year low. But in the past few weeks, borrowing costs have emerged, by one measure even crossing 7% and raising questions about whether a fledgling recovery in home sales contracts will persist.
Eve Zamora is strategically mapping out her move to Denver from Raleigh, North Carolina, for a new job in the federal government. With some buyers sidelined by high rates and election jitters, Zamora said she plans to hold off on selling her condo in North Carolina until the market improves and more bidders return.
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But she’s seizing on the pullback in demand to try and get more of a bargain on a townhome near her new job in Colorado.
“My belief is that I’ll get a better deal and that purchase price will compensate for the interest rate,” Zamora said. “Whether I’m right or wrong, it’s my strategy.”
It’s a tricky time for whipsawed home shoppers, with the market taking yet another twist. And it’s unclear exactly how many buyers will try to fight through affordability challenges to land a deal before lower rates that are expected next year will lure in more competition.
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One measure of demand — weekly mortgage applications — fell throughout much of October as borrowing costs climbed, but ticked up in the week ended Oct. 25, according to Mortgage Bankers Association data.
The Federal Reserve, which cuts its interest rate in September for the first time in more than four years, is scheduled to meet next week, after the presidential election. Yields on 10-year Treasuries have risen since the central bank’s last meeting in part because strong economic data has cast doubt on the likelihood of deep cuts ahead. In September, a measure of US inflation posted its biggest monthly gain since April, according to data released Thursday.
The jump in rates serves as a double whammy for homebuyers, choking off affordability and discouraging more owners from listing properties. The supply of housing has been kept tight by the so-called lock-in effect. Few homeowners are willing to sell if it means taking on a higher mortgage rate.
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“It’s going to put a damper on sales – affordability has gone down and the lock-in effect has increased,” said Scott Buchta, head of fixed income strategy for Brean Capital. “We think we’ll need a sub-5.5% mortgage rate to unthaw the housing market, which probably doesn’t happen any time soon unless we go into a recession.”
Even a modest drop in borrowing costs could help the market pick up, said Ralph McLaughlin, senior economist at Realtor.com. When rates fell to around 6% in September, for example, it attracted buyers who eventually signed contracts to purchase homes this month. Pending sales in October were up nearly 10% from a year earlier, according to Realtor.com data.
If rates stay high, demand will likely pull back, according to McLaughlin. But for buyers who aren’t priced out of the market, it’s actually a good time to snap up a property, he said. Inventory in October, made up of homes for sale that didn’t find buyers in the summer along with a growing number of new listings, jumped to the highest since December 2019, according to Realtor.com data.
The higher inventory is helping give buyers more leverage over sellers, according to David Lampe, an agent with the Principal Team at Metro Brokers that’s helping Zamora. The number of available listings in the Denver area shot up in October to about 24% more than the pre-Covid norm, and about 30% of listings had a price cut at least eleven, according to Realtor.com.
“I’m seeing a ton of homes that are overpriced, and you’re seeing multiple price reductions,” Lampe said.
But some house hunters are having to consider smaller properties or fixer-uppers because high borrowing costs are shrinking their budgets, he said.
Zamora told a loan officer told her, based on the monthly payment she’s comfortable paying and the recent jump in rates, that she could spend up to $450,000 on a house in the Denver area. But she’d be happy with a townhouse as long as the price is right, she said.
“If rates go down, I can always refinance,” Zamora said. “And if they go up, I can laugh because I got a good deal.”
The pullback in purchasing power has been stark, especially in expensive markets such as the Boston area. Typical customers for mortgage banker Shant Banosian in Waltham, Massachusetts, are buying properties for $1 million. But high rates have quieted the market even for Banosian, who had the second highest origination volume in the US last year. He said he’s getting about 20% fewer mortgage applications than in a recent peak in September.
“There was a lot of excitement in July, August and September as rates were coming down,” Banosian said. “When rates start approaching 7%, it changes people’s budgets big time.”
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