The residential housing market has gone through a remarkable cycle in just over two years. At the start of the COVID-19 pandemic, high unemployment threatened home prices. As the economy recovered, home prices soared nationwide by over 20% year over year. Today, high mortgage rates threaten this incredible surge.
People moved into housing markets, even those with rising prices, because mortgage rates dropped below 3% for a 30-year fixed mortgage. That figure recently hit 6%.
The period of low mortgage rates coincided with the “work from home” trend, as millions of Americans could live where they wanted to instead of where their offices were. Many people left expensive coastal cities like San Francisco and New York to move inland.
It is unlikely anyone would know the housing market better than homebuilder Lennar. In a recent earnings call, co-CEO Richard Beckwitt commented on the housing market: “So, far in June, new orders, traffic, sales incentives, and cancellations have worsened in many of our markets due to a rapid spike in mortgage rates and headwinds from negative economic headlines.”
Beckwitt ran through the markets in which his company operates. Nineteen have continued to do well, primarily because of low inventory and strong local economies. Nine markets had slightly slowing housing markets. Seven markets were in trouble. “These include Raleigh, Minnesota, Austin, Los Angeles, the Central Valley, Sacramento and Seattle.”
Why are these seven markets weak? Traffic to view homes had dropped, and people had more trouble paying high mortgage rates.
These seven markets may be a warning. Housing prices have surged so much in the past two years that prices were bound to come down. Since the economy is not uniform throughout the country, market strength also will vary. While there is unlikely to be a market collapse as there was in 2007 and 2008, the national increase in prices may be over.
With high mortgage prices and a recession looming, the days of homes that are only on the market for days are likely over, as are the days when homeowners received several bids and sold their houses above the asking price. Lennar’s viewpoint is unprecedented, based on the number of homes the company builds and sells. Rapid home price appreciation is over.
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