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NELLES: Will The Housing Market Collapse Next?

The U.S. housing market continues to stumble as rising interest rates reduce the demand for mortgages and make homes more difficult to sell. But will the bottom fall out of the market?

The 30-year “fixed-rate mortgage averaged 6.94%… as of Thursday (October 20, 2022), up from 6.92% a week ago… A year ago this time, the 30-year rate averaged 3.09%.”

As one would expect, these high mortgage rates are driving applications to near record lows.

Mortgage applications decreased 4.5% on a seasonally adjusted basis for the seven-day period ending October 14.  Application activity fell for the ninth time in 10 weeks and was 68% below its level during the same week a year ago.  Applications are now into their fourth month of declines, dropping to the lowest level since 1997.”

In addition, applications to refinance mortgages are dropping as well. “Applications to refinance a home declined 11%… and are 84% lower than the same week (week ending September 23) one year ago. They are now at a 22-year low because there are very few borrowers who can benefit from a refinance at today’s higher rates.”

These high mortgage interest rates are also hurting homebuilders’ sentiment. “Homebuilder sentiment in the single-family home market has fallen to half of what it was just six months ago… Homebuilder sentiment is at is lowest level since 2012, “with the exception of a brief drop at the start of the coronavirus pandemic.”

This explains why housing starts are down as well. “Residential starts – including both single and multi-family units – decreased 8.1% last month to a 1.44 million annualized rates.”

We are seeing a record number of people backing out of their offers to purchase homes prior to the closing date.  “Approximately 60,000 deals fell through in September, marking the highest share on record aside from March 2020, the same month the World Health Organization declared the coronavirus pandemic.” September marked the fourth consecutive month which saw 15 percent or more of home purchase contracts fall through. In August, ten cities saw “back-out” rates of more than 20 percent.

The high number of people backing out of their offers has contributed to a significant decrease in home sales. “Sales of previously owned homes fell 1.5% in September from August to a seasonally adjusted annual rate of 4.71 million units…That marked the eighth straight month of sales declines. Sales were lower by 23.8 percent year-over-year.

To make matters worse, foreclosures are back to pre-pandemic levels. Lenders started the “foreclosure process on 23,952 U.S. properties in August 2022, up 12% from (July) and up 187 percent from a year ago… there were a total of 34,501 U.S. properties with foreclosure filings – default notices, scheduled auctions, or bank repossessions – up 14 percent from (July) and up 118 percent from a year ago.”

Given the chaos in the housing market, one would expect that prices to tank, circa what happened in 2008.Not quite.

The median home price reached a “record high of $413,800 in June before falling to $389,500 in August… Some of that decline may be seasonal as the market slows down in the fall months. What’s more, the median home price in August was still nearly 8% higher than a year ago.”

What is going to happen to the housing market? Will it crash as it did during the “great recession?” The answer is probably not as circumstances are very different. Prices will fall, but the decline won’t mirror 2008. The difference is homeowners’ “personal balance sheets are much stronger today then they were 15 years ago.  The typical homeowner with a mortgage (has) a fixed-rate mortgage at a rate well below 5 percent.”

The fall in housing starts and the unwillingness of homeowners to sell homes with low mortgage rates will create a lack of inventory. My advice… stay put. For now.

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