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John Burns Real Estate analysts doubt housing market will evade slump

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Many would-be home buyers are handcuffed in the wake of escalating mortgage rates, according to Rick Palacios Jr. at John Burns Real Estate Consulting. With rates above 6%, home sales, construction volumes and even home prices in many markets are falling, he notes.

Palacios, a managing principal and the director of research at Burns Real Estate, noted affordability improved in December 2018 when mortgage rates fell to 4.5% and continued below 5% until April 2022. The “rock bottom mortgage rates” in 2020-2021 fueled robust activity, but those rates are now locking up homeowners who purchased or refinanced during the “once-in-a-generation” financing window.

“Good luck persuading someone to relinquish their sub-3% or even 4% fixed-rate mortgage when inflation is at a 40-year high and the cost of everything is wildly volatile.”

“We’re now in the sixth straight month of a 5%+ mortgage rate backdrop, and housing is struggling to find a bottom,” Palacios wrote.

Research cited by John Burns Real Estate Consulting in reaching that conclusion includes:

  • 85% of outstanding mortgages are locked in at sub-5% rates (and 24% of those are at sub-3% levels); ~ Federal Housing Finance Agency.
  • 64% of existing homeowners with a mortgage won’t purchase again if the mortgage rate exceeds 5% ~ survey by New Home Trends Institute.
  • Existing homeowners account for 51% of all home purchases and overwhelmingly require a mortgage ~ National Association of Realtors®.
  • Of the preceding group, 64% of them are reluctant to buy again at 5%+ mortgage rates, which means one-third (33%) of housing transactions could quickly vanish in the near term.
  • At mortgage rates of 6%+, more than four of every 10 (43%) of home purchasers could disappear.

Palacios characterized these percentages as “alarming” and likely reflect today’s “abysmal for-sale affordability backdrop, which remains at an all-time low.”

Adjustable-rate mortgages (ARMs) aren’t likely to offset the affordability squeeze, according to the researchers at Burns. They say stricter underwriting guidelines on ARMs are likely reducing potential home purchases for all home buyers.

Falling prices in many markets are expected to improve affordability, especially if combined with rising incomes. “This process should help nudge existing owners to purchase once again down the road, even if rates don’t revisit the historic lows of 2020-2021,” Palacios stated.

Researchers with Burns identified and mapped 98 major regional housing markets where home prices are already falling, noting its Home Value Index through August 2022 found 50 major markets where prices are still rising or flat.

Within Washington, the index shows a home price shift in Seattle of -7.8% since the peak. Spokane dropped 4.7% followed by Bremerton (-4.6%), Olympia (-2.3%), Tacoma (-2.1%) and Kennewick (-0.7%).

“Time will tell how long and how deep this recalibrating process takes before housing finds a floor,” remarked Palacios.

Consultants with Burns believe double-digit price declines may be needed for affordability to improve. As an example, they used a home loan at 4% mortgage rate on a $400,000 loan to calculate a principal and interest payment of $1,900 per month. At a 6% mortgage rate, that home’s price would need to be cut by 20% to preserve a $1,900 mortgage payment, noting “price cuts are powerful affordability levers.”

The Burns researchers are dubious about housing escaping a downtown, pointing to the accelerating pace of softening sales, construction volumes and now prices.

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