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What’s The Outlook For The Housing Market?

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Key Takeaways

  • Housing sales have fallen for the ninth consecutive month, with transactions down 28.4% compared to this time last year.
  • Average prices have also come down, hitting $379,100 compared to $413,800 in June.
  • It comes as mortgage rates continue to rise rapidly, hovering around 7% from below 3% at the end of 2021.
  • For first time buyers it means potentially taking a longer term view on their home buying plans, with investment an option to consider for increasing their down payment.

Housing sales continue to tumble as October marks the ninth month in a row we’ve seen falling numbers. It saw a 5.9% drop in sales from the previous month, with annual figures down 28.4%.

It’s the longest downward trend since 1999 and it’s causing analysts to question what it might mean for the housing market.

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

The median home price in the US hit $379,100 in October, representing an increase of 6.6% over the 12 months before. It’s not all gravy though, with that figure having come down from its June high of $413,800.

So what are we seeing here? With home sales numbers continuing to go down and the median price coming off its top, is this the beginning of a housing market downturn? Or is real estate simply taking a breather before it charges back up again?

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Why is the housing market cooling?

It’s clear that the heat is starting to come out of the housing market. This is coming off the back of a couple of 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!) led to a very active real estate sector which saw the US house price index grow 37.22% between Q1 2020 until Q1 2022.

Now the tide appears to be turning, but why?

Well, we can blame the Fed. Blame is probably a bit harsh, but the reality is that the housing market is being directly impacted by the rise in interest rates. Right now the Fed is fighting inflation hard, which has led to four consecutive rate hikes of 0.75 percentage points.

That would be a big hike if it happened just once. To have it happen four times in a row is a serious move.

The base rate is directly linked to the rate which consumers pay for mortgages. The idea behind it is that by increasing the rate of interest on mortgages, credit cards, personal loans and any other form of credit, the less money in consumers’ back pockets for spending on other things.

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

And it’s having a major impact on the mortgage market.

Last week, the average 30 year fixed rate mortgage in the US stood at 6.61%, which has come down slightly from 7.08% the week before. That’s a huge increase from the end of 2021, where the average mortgage rate was below 3%.

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

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

They’d probably been keeping a close eye on the market and may even have picked out a few homes that fit their needs.

Now, that same couple might find that their dream house is all of a sudden out of their financial reach. For a mortgage of $400,000 at an interest rate of 3%, that couple would have been looking at a monthly repayment of $1,686 per month for a 30 year fixed term.

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

Same house, same price, same down payment, but a mortgage that is almost $1,000 per month more expensive. For many buyers, this is going to make purchasing their first home simply unaffordable.

It’s not just a first time buyer problem

This same issue appears for existing homeowners who want to move house. It is sometimes possible to port an existing mortgage over to a new property, but generally speaking people want to move house to upgrade, rather than downsize.

In this instance many home movers will need to add some additional funds to their mortgage, to facilitate the move to a larger or more upscale property. Again, this is now significantly more difficult for people in that situation than it would have been six or twelve months ago.

This causes a slow down all along the chain. Fewer house movers means less properties on the market for sale and less buyers looking for somewhere new. Lower supply would usually lead to high demand, but in this situation the demand and supply are falling at the same time.

The outlook for the housing market

Obviously we don’t have a crystal ball, but it’s likely that the current trend is going to continue for some time. We can be reasonably confident about this because Fed chairman Jerome Powell has made it very clear his intent on interest rates in the coming year.

While mortgage rates seem high now, they’re likely to go much higher. The actual figures will remain to be seen, but the Fed have indicated that they see peak base rates being close to 5% by the end of the current cycle.

That’s an increase of around 0.75 percentage points from the current level, which could mean mortgage rates of over 8%. This isn’t bullish for the housing market.

Right now buyers are reluctant due to much higher mortgage costs. As house prices start to drop more, sellers will become just as reluctant to sell and will be more likely to simply hold until they can achieve a sale value closer to what it was in 2021.

It’s a common scenario in the housing market. Barring an all out crash like we saw in 2008, the sector effectively goes into hibernation as stubborn buyers hold out for a great deal and stubborn sellers anchor their property values to the previous high.

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’s not to say there’s nothing you can do to improve your chances.

One of the best ways to help get yourself on the property ladder is to make sure your down payment is as big as possible. Obviously this means saving as much as you can, but it’s also important to make the money work for you too.

If you’re expecting to be buying a property within the next year or two, then sticking to cash based options like CDs are likely to be the best option. The plus side of rising interest rates is that they will pay a little more interest than they used to, but it’s still not going to be anything crazy high.

If you’ve got three years or more until you’re expecting to be in the market for a home, you’ve got more options. This is when you can start looking to investments to help boost your initial deposit.

You probably still don’t want to go super high risk, so you want an investment with a wide range of diversification. Our Active Indexer Kit invests across the entire US market, and uses the power of AI to predict and rebalance the portfolio every week.

In addition, we can also add our AI-powered Portfolio 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 these, based on the sensitivity of the overall portfolio.

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

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