What is the outlook for the housing market?

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Key points to remember

Home sales fell for the ninth consecutive month, with transactions down 28.4% from the same period last year.
Average prices also fell, reaching $379,100 from $413,800 in June.
This comes as mortgage rates continue to rise rapidly, hovering around 7% from less than 3% at the end of 2021.
For first-time buyers, this potentially means taking a longer-term view of their home buying plans, with investing an option to consider to increase their down payment.

Home sales continue to fall as October marks the ninth straight month we’ve seen declining numbers. It recorded a 5.9% drop in sales from the previous month, with annual figures down 28.4%.

It’s the longest downtrend since 1999 and has analysts wondering what it could mean for the housing market.

Because, just like a lot of the economic data we’re seeing right now, it’s not all bad. Despite the number of home sales showing a very clear downward trend, average values have so far held up relatively well.

The median U.S. home price hit $379,100 in October, up 6.6% from the previous 12 months. That’s not all, however, as that figure has fallen from its June high of $413,800.

So what do we see here? As the number of home sales continues to decline and the median price moves away from its peak, is this the start of a housing market downturn? Or is real estate simply taking a break before recharging again?

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Why is the real estate market cooling?

It’s 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 upheaval caused by the Covid-19 pandemic.

The ability to work remotely (and the likely existential crisis experienced by many!) has led to a very active real estate sector which has seen the US house price index rise 37.22% between the first quarter of 2020 and the first quarter of 2022.

Now the tide seems to be turning, but why?

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

It would be a big hike if it only happened once. For this to happen four times in a row is a serious decision.

The base rate is directly related to the rate consumers pay for mortgages. The underlying idea is that by raising the interest rate on mortgages, credit cards, personal loans and any other form of credit, less money will be in consumers’ back pockets to spend on other stuff.

Lower spending means lower revenue for businesses, which helps slow economic growth and possibly lower inflation.

And this has a major impact on the mortgage market.

Last week, the average 30-year fixed-rate mortgage in the United States stood at 6.61%, down slightly from 7.08% the previous week. That’s a huge increase from the end of 2021, when the average mortgage rate was below 3%.

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

If you consider a couple looking for their first home, it has become much more expensive in recent months. They could have been diligently saving for their down payment, with a budget in mind as to what they could afford for their monthly mortgage payment.

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

Now, that same couple might find that their dream home is suddenly out of their financial reach. For a mortgage of $400,000 at an interest rate of 3%, this couple would have considered a monthly repayment of $1,686 per month for a fixed term of 30 years.

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

Same house, same price, same down payment, but a mortgage that costs almost $1,000 a month more. For many buyers, this will make buying their first home simply unaffordable.

It’s not just a problem of buying a first home

This same problem appears for existing owners who wish to move. It is sometimes possible to transfer an existing mortgage to a new property, but as a rule people prefer to move to modernize rather than downsize.

In this case, many movers will need to add additional funds to their mortgage, to facilitate the move to a larger or more upscale property. Again, it’s much more difficult now for people in this situation than it was six or twelve months ago.

This causes a slowdown throughout the chain. Fewer movers means fewer properties on the market for sale and fewer buyers looking for a new location. A lower supply would usually result in a high demand, but in this situation both demand and supply decrease at the same time.

Housing market outlook

Obviously, we don’t have a crystal ball, but the current trend is likely to continue for some time. We can be reasonably confident about this, as Fed Chairman Jerome Powell has made clear his intentions regarding interest rates over the coming year.

Although mortgage rates seem high right now, they are likely to rise much more. The actual numbers will remain to be seen, but the Fed has indicated that it expects peak base rates close to 5% by the end of the current cycle.

This is an increase of about 0.75 percentage points from the current level, which could mean mortgage rates over 8%. This is not bullish for the housing market.

Currently, buyers are reluctant due to much higher mortgage costs. As home prices begin to fall further, sellers will become equally reluctant to sell and more likely to simply hold on until they can reach a sale value closer to what it was in 2021. .

This is a common scenario in the housing market. Barring a total crash as we saw in 2008, the sector effectively goes into hibernation as stubborn buyers hold on and stubborn sellers anchor their property values to the previous peak.

How first-time buyers can prepare

We’re not going to sugar coat 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 improve your chances.

One of the best ways to help you move up the homeownership ladder is to make sure your down payment is as large as possible. Obviously, that means saving as much as you can, but it’s also important to make the money work for you, too.

If you plan to buy a property in the next year or two, sticking to cash options like CDs is probably the best option. The positive side of rising interest rates is that they will pay a bit more interest than before, but it still won’t be very high.

If you have three or more years before you’re in the market for a home, you have more options. This is when you can start looking for investments to help you increase your initial deposit.

You probably still don’t want to go for very high risk, so you want an investment with a wide range of diversification. Our active indexing kit invests across the entire US market and uses the power of AI to predict and rebalance the portfolio weekly.

Additionally, we can also add our AI-powered wallet protection. This uses AI to analyze your portfolio and then assesses its exposure to various forms of risk, including interest rate risk, oil risk, and overall market risk.

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

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