Realtors’ economist: High interest rates, low inventory crimping housing market

A housing market challenged by higher mortgage rates and a lack of listings would improve next year if interest rates decrease, according to National Association of Realtors Chief Economist Dr. Lawrence Yun.

Yun told Arkansas Realtors Association members at their annual convention Wednesday (Sept. 20) in Hot Springs that he expects current rates of 7% to fall by early spring. The rental market with its rising rates will also stabilize.

Yun predicted rates would fall to 6%. He made that prediction hours before the Federal Reserve Bank declined to raise the benchmark federal funds rate, which currently stands at 5.4%.

However, the Fed indicated it would make one more quarter-point rate hike this year before cutting rates twice in 2024 down to 5.1%. That’s a change from June, when Fed officials had signaled they would cut rates four times next year.

The housing market is struggling under the weight of high interest rates that have kept sellers from selling and buyers from buying. Many homeowners are enjoying rates as low as 2.95% that they received when they bought houses during the pandemic, when the Federal Reserve dropped its benchmark rate to 0%.

Since last spring, Yun said the Fed has been “sometimes surprisingly aggressive” in raising rates to combat inflation, and now mortgage rates are above 7%. Monthly payments have almost doubled in some cases, from about $1,000 as late as 2021 for a typical home to more than $2,000 in 2023.

“The home sales decline is coming from higher mortgage rates, higher mortgage rates, higher mortgage rates,” he said.

Yun said an interest rate reduction would release pent-up demand. He noted that in two years, the following changes occur in society: seven million newborn babies, three million marriages, 1.5 million divorces, seven million individuals turning 65, four million deaths, four million net new jobs, and 50 million job switches.

All of those can create a need to move, and while people are reluctant to give up their 3% rate, he said they may decide it’s time for the baby to stop sleeping in the kitchen.

“Many people will realize 3% is not a possibility, 4% probably not, 5% maybe, 7% is costly, but a 6% mortgage, what the heck? I need to make a move,” he said.

Yun said the Fed has been increasing rates to decrease inflation, which reached 9% last summer. The trend line is moving in a downward direction, but it still was at 3.7% in August, which was higher than the 2% rate the Fed would prefer. A major contributor is rent inflation, which was 7.3% in August. That’s the main indicator he’s watching. Car insurance is up 19.1% from a year ago.

Yun said home sales have fallen the past two years – by 15% in Arkansas both years. Home sales were stable before Covid, fell during the lockdown, rose again and have since fallen so that they are down 23% year-to-date compared to pre-covid numbers. In Arkansas, real estate was considered an essential business, so agents were able to do their jobs. In Pennsylvania, real estate was not considered essential and was locked down for a time, so sales fell to near zero.

Home prices are up significantly across the country except for the West over the past year – in Arkansas by 8%. Home prices are up across the country since the onset of Covid and in Arkansas by 46.1%, he said.

Yun said inventory availability of existing homes is half of what it was pre-Covid. Meanwhile, newly constructed home sales are at the same level or above what they were, while homebuilders’ stock prices have increased significantly.

The National Association of Realtors wants to increase inventory with help from federal tax policies. It would like to index to inflation the tax exemption for sales of a primary residence. The current amounts of $250,000 for a single person and $500,000 for a married couple have not increased for 25 years.

Tax exemptions or reductions might also encourage mom-and-pop real estate investors to unload properties onto the market. Yun suggested making the exemptions conditional so that they could only be received when the house is sold to a first-time buyer.

Meanwhile, the job market is up considerably. Nationally, 20 million jobs were lost at the beginning of the pandemic, but job numbers have steadily climbed so that now four million more people are working than since before the pandemic. Arkansas has been one of the top 10 performers, with 5.7% more people working.

He said Republicans and Democrats will offer dueling narratives during the election year. Democrats will point to the fact that wage growth has been outpacing consumer price index inflation in the past 12 months. Republicans will note that wage growth has not caught up with CPI inflation since the beginning of the Biden administration.

Yun said the current environment has affected other segments of the economy. Commercial real estate transactions and real estate property prices are down overall.

He said about half of the nation’s roughly 5,000 smaller-sized banks have experienced “a little bit shaky conditions” because they have the same problem as the failed Silicon Valley Bank in California did – an interest rate mismatch. Banks have invested in government bonds, mortgages and long-term assets paying them 3-4%, which was fine when the banks had borrowed the money at 0%. But now they are having to pay higher rates of 4% in order to attract consumer deposits. The Federal Reserve has set up a special credit line for community banks in this situation.

The nation’s larger banks, in contrast, meet regularly with Washington regulators and undergo a stress test analysis that forces them to consider how they would adjust to rate increases.

“In other words, higher interest rate policy from Washington is causing harm to Realtors, is causing harm to commercial real estate and causing harm to community banks,” he said.

Yun said another contributing factor to the increasing rates has been the national debt, which reached $33 trillion Friday. Fitch recently downgraded the federal government’s credit rating from AAA to AA, and interest payments will soon eclipse what the federal government spends on the military.