Topline

After a pandemic-era home-buying frenzy, the number of homes for sale nationwide saw its first annual increase since July 2019 last month, according to real estate brokerage Redfin, which joins a growing chorus of experts predicting the housing market will continue to cool so long as interest rates keep rising—potentially helping prices fall as soon as this year.

Key Facts

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Housing supply rose 2%, Redfin reported Thursday, noting the number of homes for sale has risen as a result of higher home prices and the Federal Reserve’s interest rate hikes, which have pushed more buyers to the sidelines.

The average mortgage rate has jumped to 5.7% from less than 3.3% at the start of the year—adding hundreds of dollars to the average monthly payment for new mortgages and cratering demand, with home sales falling nearly 16% from a year ago in June and posting the largest decline since May 2020, according to Redfin.

“The country’s economic woes have already cooled the housing market, and they’re likely to continue dampening demand,” Redfin chief economist Daryl Fairweather said in a statement, noting the abrupt shift has already started impacting sales prices, which fell 0.4% month to month but are still growing at 11.2% on an annual basis.

In a note to clients this month, Goldman Sachs chief credit strategist Lotfi Karoui noted housing affordability has deteriorated to its worst level since at least 1996 as mortgage rates have risen, adding that it will likely remain at “historically challenging levels” through the end of the year.

However, he also points out a growing share of single-family home listings are cutting prices—particularly in the “hottest” pandemic markets such as Phoenix and Boise, Idaho; redfin reported a record-high share of sellers dropped their asking prices after the Fed’s rate hike in June, reflecting “mounting pressure” to sell as demand suffers.

“The party is over,” Pantheon Macro chief economist Ian Shepherdson says of the price cuts, predicting the combination of falling demand and rising supply is likely to trigger price declines over the second half of the year as the housing market “finds a new equilibrium —from a seriously stretched starting point.”

Crucial Quotes

“The Fed has signaled it may increase interest rates further to combat stubbornly high inflation, which could harm consumer confidence, and lower stock prices mean fewer prospective home buyers can afford a down payment,” says Fairweather, advising potential sellers to “do it quickly before demand falls further."

Key Background

Home buying demand skyrocketed during the pandemic as interest rates collapsed and an influx of Americans started working from home. However, the Fed's rate hikes have quickly spurred a reversal. Mortgage originations jumped from $2.3 trillion in 2019 to more than $4 trillion in 2020 and 2021, but demand has since plummeted to the lowest level in more than two decades.

Tangent

The housing market's steep turnaround is already starting to take its toll on the industry's workforce. Earlier this week, mortgage originator loanDepot unveiled a plan to cut thousands of jobs and reduce costs “significantly” as the firm works to revert staffing and costs to prependemic levels. "After two years of record-breaking volumes, the market has contracted sharply and abruptly in 2022," CEO Frank Martell said in a statement. The firm anticipates "challenging market conditions" to continue through next year and an "accelerated" downturn in the coming months, cutting mortgage originations by roughly half this year, as compared to last year. Redfin and Compass have also announced layoffs, as have the home-lending departments of JPMorgan and Wells Fargo.

Mortgage Giant Cuts Thousands Of Jobs—Warns Of 'Accelerated' Downturn As Housing Market Abruptly Collapses (Forbes)