Housing Market's Bucking Historical Trends

A strong economy that is generating jobs tends to be good for the housing market. But right now in the U.S., a robust economy where companies are looking to hire workers tends to create challenges for the housing market, Freddie Mac's Chief Economists Sam Khater said on Thursday.

Why?

Americans with jobs means that they are making money that they will spend in the economy. This threatens to keep the price of goods and services elevated. But right now, the American economy is grappling with inflation that at one point soared to 40-year highs. The Federal Reserve responded by hiking rates at their most aggressive clip since the 1980s beginning in March 2022 to their current range of 5.25 to 5.5 percent.

In January, policymakers kept rates at that level for the fourth consecutive meeting and signaled that their hiking cycle was done as inflation cooled. Prices accelerated by 3.1 percent last month, slower than in December, but not quite to the 2 percent target of the central bank.

On Thursday, the Labor Department revealed that jobless claims fell which suggests that those looking for jobs can find one. But this good economic news could mean inflation takes longer to get to that central bank target as Americans splash their cash and keep spending.

"Strong incoming economic and inflation data has caused the market to re-evaluate the path of monetary policy, leading to higher mortgage rates," Khater said.

Fears that the Fed will retain high borrowing costs for longer to get prices down to target has put pressure on mortgage rates. The cost of a home loan, which declined from its two-decade high of 8 percent last October to the mid-6 percent has ticked up again to the 7 percent category in recent weeks and leading to the plummetting of mortgage applications.

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Freddie Mac said on Thursday that the 30-year fixed rate mortgage averaged 6.90 percent as of February 22, 2024, climbing last week's average of 6.77 percent.

"Historically, the combination of a vibrant economy and modestly higher rates did not meaningfully impact the housing market," Khater said. "The current cycle is different than historical norms, as housing affordability is so low that good economic news equates to bad news for homebuyers, who are sensitive to even minor shifts in affordability."

The jump in rates means that buyers will have to pay more in monthly mortgage payments. At a 6.77 percent rate, for example, homeowners will have to pay about $2,640 a month in mortgage payments, a nearly 8 percent jump from a year ago, according to Redfin. Meanwhile, higher mortgage rates are stifling supply, especially in the used homes market, as sellers stay put in their low-mortgage houses, which in turn is pushing up prices.

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The National Association of Realtors revealed on Thursday that used home sales rose by 3.1 percent in January, though on an annual basis they were close to 2 percent down. The median price of a home was also up by more than 5 percent compared to a year ago in what was the strongest gain since October 2022, according to Lead U.S. economist at Oxford Economics Nancy Vanden Houten.

"We expect the scarce supply of existing homes to keep home price growth positive this year," she said in a note shared with Newsweek.

The one silver lining for affordability is policymakers have said that they are probably going to cut borrowing costs later in the year, which would help reduce the cost of a home loan.

"As the Fed prepares for their first rate cut in years, investors should expect mortgage rates to fall by the end of this year, providing a catalyst for an improving residential real estate market later this year," Jeffrey Roach, chief economist for LPL Financial, said in a note shared with Newsweek.