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  • Writer's pictureNancy Bennett

The housing market correction will be deep, and ugly!

Updated: Dec 13, 2022

I read this article last night and felt it was appropriate to share with my readers as well. The article touches on the market’s reaction to yesterday's rate increase and what to expect from the Fed moving forward. My hope is that they ease up a bit in the coming months and allow the markets, buyers and sellers to adjust to all of the significant changes that have taken place in the last 4 months.

Housing Wire, Sept. 22, by Flávia Furlan Nunes

You think things are bad in the housing market now? Stick around and see if mortgage rates climb into the 7% range. (I feel that we will hit 7% rates sooner than the end of this year.)

If it happens, the current origination forecast of $2.2 trillion in 2023 will look awfully rosy. Even the most battle-tested industry players are preparing for one of the strongest housing market corrections in decades.

Federal Reserve Chairman Jerome Powell sent a clear message during a press conference following the announcement of the central bank’s decision to hike the federal funds rate by 75 basis points on Wednesday: The ongoing housing market correction, which brought the largest mortgage rates increase in four decades, is far from at an end.

“Builders are having a hard time finding lots, workers and materials,” Powell said. “For the longer term, what we need is supply and demand to get better aligned, so house prices go up at a more reasonable pace and people can afford houses. Probably, the housing market needs to go to a correction to get to that place.”

So far, the tightening monetary policy led the 30-year fixed mortgage rate to 6.29% this week, up 27 basis points from the previous week, the Freddie Mac’s Primary Mortgage Market Survey (PMMS) showed Thursday. A year ago at this time, rates averaged 2.86%.

“The housing market continues to face headwinds as mortgage rates increase again this week, following the 10-year Treasury yield’s jump to its highest level since 2011,” Sam Khater, Freddie Mac’s chief economist, said in a statement. “Impacted by higher rates, house prices are softening, and home sales have decreased. However, the number of homes for sale remains well below normal levels.”

(For perspective, here's our local current housing inventory:

  • Walnut Creek has only 67 detached homes for sale.

  • Concord has only 111 homes for sale.

  • Pleasant Hill has only 37 homes for sale.

Sellers are just not selling – after securing VERY low mortgage rates over the last few years, they need to be really motivated to let go and move on.)

“But the biggest takeaway for the mortgage industry is that Powell remained completely unflinching in his commitment to hike rates as much as it takes to tackle inflation,” Graham said. “Between yesterday afternoon and today, the entire financial market is in the throes of adjusting to that new reality. Mortgage-backed securities are right about the worst place on the duration spectrum for this move. Freddie’s weekly survey is hopelessly low today – actual 30-year-fixed rates are well over 6.5% now.”

(To understand the impact on borrowers, this week’s increase in mortgage rates to 6.29% resulted in a monthly payment on a $400,000 loan of about $2,470, compared to $1,660 a year ago, according to Nadia Evangelou, National Association of Realtors senior economist and director of forecasting.

“Owners may be locked into their existing homes as mortgage rates rise, and the 3% rates from last year may not be back anytime soon. While the nation suffers from a severe housing shortage, lower mobility can make housing inventory even tighter and cause home prices to continue escalating.”)

Sean Grapevine, a branch manager for UMortgage based in Atlanta, said Wednesday’s Fed decision pushed rates up by 50 to 75 basis points over the last couple of weeks, which is not entirely bad for the housing market. “Rising rates from the Fed do cause some temporary pain as people adjust to the differences, but a few years of 5% to 7% interest rates on mortgages are going to be good for the economy, great for buyers, as demand becomes less insane, and more sustainable long-term,” he said.

(There’s a lot to unwind as we navigate the current economical and political environment over the next few months. Keep your chin up, consider cutting expenses and taking care of home repairs over the next few months as we prepare for the holidays!)

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