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On Wednesday the Federal Reserve announced the largest rate increase – 0.75% – since 1994 in an effort to curb inflation. Many expect still more rate hikes to come.
Under the current rates, a $300,000 mortgage would cost $1,800 monthly, up from just $1,265 in December 2021.
While home sales have been recently trending towards 2019, pre-pandemic levels, many analysts expect the buyer pool to shrink with sellers forced to properly price their homes to attract the sellers who are left.
While the price of groceries and gas – both 8.6 percent from a year ago – have seen the most dramatic increases, the continued increase in housing costs is also punching inflation to heights not seen since 1982.
Mortgage rates are now climbing, currently an average of 3.85 percent, according to Freddie Mac.
These rates, combined with the acceleration of home prices and rental rates. are only adding to the inflationary pressure.
As if the Bay Area housing market wasn’t challenging enough already, the price of just about everything continues to soar.
A few examples:
None surprisingly, with more people at home over the last two years due to the pandemic, electricity bills have increased for many. According to a new study by Sense, a resource for home energy management, some of this increase can be attributed to extreme weather brought on by climate change.
The Wall Street Street Journal reports that gas prices will be increasing this winter as well with estimates between 30 to 50 percent hikes, depending on the severity of the winter cold.
As inflation rises to 6.2 percent – the highest rate since 1990 – an already tight housing market has seen home prices and rents increasing at an alarming rate. What does the future hold?
Many experts see a major part of the problem in supply chain issues. During the pandemic, many services – going out to eat or to the movies, gym memberships, etc. – declined drastically as the demand for goods increased. As we’ve seen, the supply chain has struggled mightily to keep up with this demand and, combined with a shortage of capable or willing workers – prices have skyrocketed in everything from appliances to cars to, yes, homes.
As the supply chain improves, analysts see the prices stabilizing. However, interest rates could increase up to 3.7 percent in 2022 which will hurt buyers.
Certainly not a surprise – and certainly not what the housing market needs – but MarketWatch recently reported that rising inflation is adding to housing costs in all areas. Rents have increased an average of 3 percent – significantly more in some areas – while natural gas prices have risen a whopping 25 percent in the last year.
It’s estimated that mortgage rates will rise in 2022, with many expected 3.7 percent by the end of the year.
However, may see real estate values continuing to outpace inflation, at least in the short-term.
One result of the pandemic has been U.S. workers leaving their jobs in record numbers. Common reasons cited included dissatisfaction with their employers, a desire to work from home permanently, greater work-life balance, and a new career. A full 33 percent of those leaving their jobs started their own business.
Meanwhile, a survey by Coldwell Banker found that 41 percent of Americans would accept a pay cut or a new job at a lower wage if it meant moving to a more affordable location with an even higher rate (46 percent) coming from the Northeast and West.
It is estimated that as many as 575,000 homeowners will have their forbearance plans expire in late September or early October. Mortgage providers have been adding staff and plan to be creative in assisting borrowers who are still struggling to pay their bills.
As many as 7.25 American homeowners took part in forbearance programs at some point during the pandemic. Approximately 72 percent of those have already exited the programs.
With the booming real estate markets in the Bay Area, particularly San Francisco and San Jose, it’s easy to overlook the fact that nationwide, areas that experienced the highest rate of foreclosure during the previous recession have still not fully recovered. In fact, across the largest 35 metro areas, only 39 percent of homes in sections with the most foreclosures have fully recovered.
Overall, 21 of the largest 35 metro areas have recovered their pre-recession peak median home values. Nationwide, median home values are approximately 9.8 percent above what they were at the bubble’s peak. Yet, many economists are concerned that a significant number of homes will not recapture their pre-recession value before the next downturn eventually comes.
A recent talk by Lawrence Yun at the Realtors Conference & Expo highlighted the need for new housing inventory and expressed confidence that the real estate market would remain strong. He predicted that around 6 million home sales by the end of 2018 and slightly more in the next few years.
Moreover, home prices will continue to increase but at a modest rate: 4.7 percent this year, 2.1 percent in 2019 and 2.7 percent in 2020.
Yun saw no signs of a housing bubble as the overall economy is strong, the quality of mortgages remains high and there is no danger of overbuilding as in 2008.
The one caveat is the risk of a full-scale trade war which would hurt economic growth and lead to higher interest rates which could move the economy closer to a recession.
