Since the beginning of 2022, 30-year fixed mortgage rates have surged from slightly over 3% to well over 5% — causing a drop in demand for new purchase loans and refinancing services. Sales of new single-family homes in April fell to 591,000 — falling far short of the 750,000 expected by analysts, as well as 16.6% below home sales in March.
For luxury homes — the top 5% of the market — sales dropped 18% from February to April 2022 in comparison to the same period last year, according to a report from real estate brokerage Redfin obtained by The Wall Street Journal. Prices, however, still remain elevated.
“Many home seekers are deciding that it’s simply not worth it to purchase a luxury home at a time that both purchasing price and lending costs are so high,” Heritage Foundation research fellow Joel Griffith told The Daily Wire.
Indeed, persistent economic factors — such as the supply chain bottlenecks and labor market shortages that worsen overall inflation rates — are giving consumers pause and directly impacting the housing market. A plummeting stock market is also producing hesitation among luxury buyers.
“Relative to lower-priced homes, a greater percentage of purchase price is paid for in cash — rather than utilizing a mortgage since the cost often exceeds conforming loan limits,” Griffith continued. “Many purchasers are balking at cashing out of stocks at depressed levels in order to purchase real estate at inflated — possibly bubble — levels.”
Earlier this year, the Federal Reserve Bank of Dallas predicted a housing bubble amid a “market exuberance” that is “unhinged from fundamentals” — a warning that has not been issued since the housing market crash of 2008.
Griffith observed that home prices are now growing faster than household income.
“The home price-to-median income ratio stands exceeds 7.2, eclipsing the 7.03 peak in late 2005. Compare that to a ratio of well under 5.0 from 1980 to 2000,” he remarked. “In just 12 months, mortgage payments based on median home prices have increased more than 40% due to the rise in prices combined with a near doubling of mortgage rates. The mortgage payment-to-income ratio hit 34.9% in February — the bleakest affordability levels since 2008.”
More broadly, inflation has led to a precipitous decline in real average hourly earnings — even though unemployment remains low in the United States. Even as wages nominally grew between May 2021 and May 2022, real wages dropped by 3% due to the faster rate of inflation. For a person earning $50,000 per year, rising price levels have functionally induced a $1,500 annual pay cut.
Wealthy Americans who still want to buy property may lower their gaze on middle-class homes — creating even more pressure on American families.
“As higher-income, wealthier home buyers find themselves deterred from purchasing luxury homes, this may place yet more buying pressure on smaller, more modest homes,” Griffith said. “Middle-class families may find themselves increasingly competing with wealthier families for lower-prices homes.”
Beyond current market conditions, there are mismatches between supply and demand that continue to plague the residential real estate sector. Construction of new long-term housing has already been slowing over the past several decades — resulting in about 6 million too few homes on the market.