What are the prospects for the housing market?


Key learning points

  • Home sales fell for the ninth consecutive month, with 28.4% fewer transactions than at this time last year.
  • Average prices also fell, reaching $379,100 compared to $413,800 in June.
  • This is because mortgage interest rates continue to rise rapidly, from below 3% at the end of 2021 to around 7%.
  • For first-time buyers, this means they may have a long-term view of their home buying plans, with investments being an option to consider to increase their down payment.

Home sales continue to fall, as October is the ninth month in a row that we see falling numbers. It saw a 5.9% drop in revenue from the previous month, with full-year sales falling 28.4%.

It is the longest downward trend since 1999 and analysts are wondering what this could mean for the housing market.

Because like much of the economic data we see now, it’s not all bad. Despite the fact that the number of house sales shows a very clear downward trend, the average values ​​have held up reasonably well so far.

The median home price in the US reached $379,100 in October, up 6.6% from the previous 12 months. It’s not all gravy, though, as that figure is down from its June high of $413,800.

So what do we see here? Is this the start of a downturn in the housing market as home sales continue to fall and the median price peaks? Or is real estate just taking a breather before recharging?

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Why is the housing market cooling down?

It is clear that the heat is starting to come out of the housing market. This comes after a few years of incredibly strong growth, despite the turmoil caused by the Covid-19 pandemic.

The ability to work remotely (and the likely existential crisis experienced by many!) led to a very active real estate industry that saw the US housing price index grow by 37.22% between Q1 2020 and Q1 2022.

Now the tide seems to be turning, but why?

Well, we can blame the Fed. The debt is probably a little hard, but the reality is that the housing market is directly affected by the rise in interest rates. Currently, the Fed is fighting inflation hard, which has led to four consecutive rate hikes of 0.75 percentage points.

That would be a big increase if it only happened once. Making it happen four times in a row is a serious move.

The base rate is directly linked to the interest that consumers pay for mortgages. The idea behind it is that by raising interest rates on mortgages, credit cards, personal loans, and any other form of credit, less money goes into consumers’ back pockets to spend on other things.

Lower spending means lower revenues for businesses, which slows economic growth and ultimately lowers inflation.

And it has a major impact on the mortgage market.

Last week, the average 30-year fixed rate mortgage in the US was 6.61%, slightly down from 7.08% the week before. That is a huge increase compared to the end of 2021, when the average mortgage interest rate was below 3%.

This one issue is causing a significant problem for the real estate market.

If you consider that a couple is looking for their first home, it has become a lot more expensive in recent months. They could have diligently saved for their down payment, budgeting in mind what they could afford for their monthly mortgage payment.

They probably watched the market closely and maybe even picked out a few houses that suited their needs.

Now that same couple could discover that their dream home is suddenly out of their financial reach. For a $400,000 mortgage at 3% interest, that couple would have been looking at paying $1,686 per month for a fixed term of 30 years.

Now, with rates around 7%, that same mortgage would cost them $2,661 a month.

Same house, same price, same down payment, but a mortgage that is nearly $1,000 more expensive per month. For many buyers, this will simply make purchasing their first home unaffordable.

It’s not just a problem for the first time purchase

The same problem occurs with existing homeowners who want to move. It is sometimes possible to transfer an existing mortgage to a new home, but generally people want to move to upgrade, rather than downsize.

In this case, many movers will need to add some extra money to their mortgage to facilitate the move to a larger or more luxurious property. Again, this is significantly more difficult for people in that situation now than it was six or 12 months ago.

This causes delays throughout the chain. Fewer movers means fewer homes on the market for sale and fewer buyers looking for a new place. A lower supply usually leads to a higher demand, but in this situation the demand and the supply fall at the same time.

The outlook for the housing market

We don’t have a crystal ball, of course, but it is likely that the current trend will continue for a while. We can be pretty sure of this because Fed Chairman Jerome Powell has made it very clear what his intentions are regarding interest rates in the coming year.

Although mortgage rates now seem high, they are likely to go much higher. Actual numbers are yet to be revealed, but the Fed has indicated that it sees rates close to 5% of base rates by the end of the current cycle.

That’s an increase of about 0.75 percentage point from current levels, which could mean mortgage rates above 8%. This is not good for the housing market.

At the moment, buyers are hesitant because of much higher mortgage costs. As home prices begin to fall more, sellers will become just as reluctant to sell and more likely to simply hold on until they can reach a sales value closer to that of 2021.

It is a common scenario in the housing market. Barring a total crash like we saw in 2008, the industry is effectively going into hibernation as stubborn buyers hold out and stubborn sellers anchor their property values ​​at the previous high.

How starters can prepare

We’re not going to sugarcoat it, buying your first home is probably going to get a lot harder before it gets easier. But that doesn’t mean you can’t do anything to increase your chances.

One of the best ways to get yourself up the property ladder is to make sure your down payment is as high as possible. Obviously, this means saving as much as possible, but it’s also important to make the money work for you as well.

If you expect to buy a home within a year or two, sticking with cash-based options such as CDs is probably your best option. The bright side of rising interest rates is that they’ll pay a little more interest than they used to, but it still won’t be anything crazy.

If you have three years or more before you expect to hit the market for a home, you have more options. This is when you can start looking for investments to boost your first deposit.

You probably still don’t want to run super high risk, so you want an investment with a wide range of diversification. Our Active Indexer Kit invests across the US market and uses the power of AI to forecast and rebalance the portfolio on a weekly basis.

In addition, we can also add our AI-powered Portfolio Protection. This uses AI to analyze your portfolio and then assesses exposure to various forms of risk, including interest rate risk, oil risk and general market risk.

It then automatically implements advanced hedging strategies to offset them, based on the sensitivity of the overall portfolio.

It’s like having your own personal hedge fund in your pocket.

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