The housing market is poised for its “most significant contraction” since 2006 as declining purchase activity makes “some relief” in prices possible, according to top economists from government-backed mortgage company Freddie Mac.
Sharing data from the Mortgage Bankers Association’s Weekly Mortgage Applications Survey, Freddie Mac Deputy Chief Economist Len Kiefer observed that mortgage applications had declined 40% from their seasonally adjusted peak. “The U.S. housing market is at the beginning stages of the most significant contraction in activity since 2006,” he argued. “Mortgage applications are pointing to a large decline over summer.”
Likewise, for luxury homes — the top 5% of the market — sales fell 18% from February to April 2022 compared to the same period last year, according to a report from real estate brokerage Redfin obtained by The Wall Street Journal. A plummeting stock market is likely contributing to hesitation among luxury buyers.
Persistent economic woes — such as the supply chain bottlenecks and labor market shortages that are worsening overall inflation rates — are also giving consumers pause and directly impacting the housing market.
Kiefer also noted that “periods of rapid increases in interest rates are typically associated with contractions in home sales” due to the rising cost of borrowing funds implied by high interest rates. Indeed, the 30-year fixed-rate mortgage has surged from roughly 3% at the beginning of the year to 5.2% as of June 9, according to data from Freddie Mac.
“After little movement the last few weeks, mortgage rates rose again on the back of increased economic activity and incoming inflation data,” Freddie Mac Chief Economist Sam Khater remarked in a press release. “The housing market is incredibly rate-sensitive, so as mortgage rates increase suddenly, demand again is pulling back. The material decline in purchase activity, combined with the rising supply of homes for sale, will cause a deceleration in price growth to more normal levels, providing some relief for buyers still interested in purchasing a home.”
Between quarter two of 2020 and quarter one of 2022, the median home sales price has increased from $322,600 to $428,700 — a 33% increase in less than two years, according to the U.S. Census Bureau data.
Despite the elevated prices and declining purchase activity, most economists do not believe that the United States is presently experiencing a housing bubble, according to a recent survey from Zillow. The 60% of respondents who denied bubble conditions pointed to rationales such as scarce inventory, low credit risk, and other factors divorced from speculative behavior.
Earlier this year, however, analysts from the Federal Reserve Bank of Dallas forecasted a housing bubble amid “market exuberance” that is “unhinged from fundamentals” — a warning that has not been issued since the housing market crash of 2008.
“An asset — in this case, housing — is in the primary expansionary phase of a bubble when price rises are out of step with market fundamentals,” they wrote. “Rapid real house-price appreciation, such as that observed now, does not in itself signal a bubble… But real house prices can diverge from market fundamentals when there is widespread belief that today’s robust price increases will continue. If many buyers share this belief, purchases arising from a ‘fear of missing out’ can drive up prices and heighten expectations of strong house-price gains.”