The popular spring home buying season is just getting started. However, one analyst warns it could be a bust.
Ian Shepherdson, chief economist and founder of research consultancy Pantheon Macroeconomics, predicts a dramatic drop in home sales this year. In a research note, he forecast existing home sales to fall about 25% from the annual pace of 6.02 million set in February to a rate of 4.5 million by the end of the summer.
“The housing market is in the early stages of a significant slowdown in activity that will trigger a sharp decline in the rate of home price growth, perhaps beginning as early as the spring,” Shepherdson wrote in a research note distributed Sunday.
Shepherdson pointed to mortgage demand as evidence of this expected slowdown in home sales. The latest mortgage application data from the Mortgage Bankers Association shows applications for home-buying loans are down more than 8% from a year ago. In comparison, the demand for refinancing has fallen by almost 50% compared to the previous year.
A drop in mortgage demand could predict a drop in home sales as most buyers rely on financing to secure a large purchase. Affordability issues are likely responsible for the decline. On Thursday, the average interest rate on the 30-year fixed-rate mortgage topped 4% for the first time since May 2019, according to Freddie Mac FMCC.
According to Shepherdson’s calculations, the rise in mortgage rates since September has increased the cost of a monthly mortgage payment on an average home by more than $400, or 27%.
“That’s a huge increase, even for households sitting on savings accumulated during the pandemic – a one-off increase in savings cannot fund an increase in mortgage payments for the next 30 years – and it will push demand down quite a bit further.” . ” he wrote.
In fact, affordability is paramount for today’s home buyers. A recent survey conducted by US News & World Report found that nearly half of buyers say affordability is their top concern, although the majority of respondents said they are still optimistic they will be able to buy a home in the next year.
““A one-time increase in savings cannot fund an increase in mortgage payments for the next 30 years.””
The implications of a shift in existing home sales would be far-reaching, Shepherdson said, arguing that the pace of rent increases would eventually slow and maybe even reverse. It would also extend to new home sales, which he expects will also decline. A fall in new home sales would push down GDP as it would lead to less demand for home construction-related services and less spending on items like building materials and appliances.
The bad news for all Americans who continue to try to buy a home in these conditions is that it’s less clear how this situation will ultimately affect the availability of homes for sale. Part of the reason for the rise in property prices is that there is a significant shortage of inventory in the property market, which has fueled competition for the few properties available for sale.
A drop in demand would appear to result in an increase in the inventory of homes for sale. But Shepherdson warned that many sellers could pull bids or refuse to put their home on the market because “nobody […] want to be the last person trying to sell in a falling market.”
https://www.marketwatch.com/story/the-housing-market-is-in-the-early-stages-of-a-substantial-downshift-home-sales-may-drop-25-by-the-end-of-summer-according-to-this-analyst-11647884229?rss=1&siteid=rss “The housing market is in the early stages of a significant downtrend”: According to this analyst, home sales could fall by 25% by the end of the summer. Here’s why.