Housing Market Update - Why Mortgage Applications Are Going Down

Housing Market Update - Why Mortgage Applications Are Going Down
Hi everybody, thanks for checking in today. We’ve got some big news coming straight out of Washington D.C. that is going to affect every single home purchase for at least the rest of 2022. This is a subject we have been thinking was on its way for the last few months, and it’s finally arrived!
The big news from our nation’s capital is that the US government is actively trying to push the housing market back down in terms of how much money homes are currently selling for. In the opinion of the US government, we have reached the point where inflation is so high that people no longer have these large sums of money to put down on a house. Therefore, the government is using some of its power to slow that growth and try to start restoring some order to the real estate market. The surefire solution to that problem is to raise mortgage rates higher and higher. This makes it difficult for people to afford homes at their current price points, not to mention getting approved for mortgages. As home sales slow, sellers will have to respond by lowering their prices significantly in order to attract attention.
Let’s check in with Ralph McLaughlin, the chief economist at Kukun, who told Fortune, “While I don’t anticipate a collapse a la the Great Recession, rising mortgage rates and inventory are sure to cool what has been an unprecedented time for the US housing market.”
The organization behind this softening of prices is the Federal Reserve, the central bank of the United States, which has the power and the responsibility to try and keep prices at reasonable levels so that the average person can afford to provide for themselves and their families.
Fed Chairman Jerome Powell was recently confirmed for a second term in office last month and now he is addressing the problem of how high prices on just about everything have become in the United States.
Powell told the Wall Street Journal that, “in hindsight, it would have been better to raise interest rates earlier,” as prices soared throughout 2021.
What is Inflation and How Does it Work?
In order to understand how inflation affects the housing market, we have to understand inflation itself. Basically, inflation is the measure of the increase of the average price levels of a collection of basic goods in an economy over a period of time. In the United States, that collection includes more than 94,000 items, everything from groceries to gas to clothes to the cost of renting a home. The government uses a measurement called the CPI-U (Consumer Price Index for All Urban Consumers) to reflect the current inflation rate.
According to the Federal Reserve, the government likes to keep the rate of inflation around 2.0%. Between 2012-2020, it has never gone higher than 2.3%. Then in 2021, the year after the pandemic, it shot up to 7%. Economists thought this was because of the pandemic and that it was only temporary, but they were wrong. As of May 2022, inflation has reached 8.6%, the highest it has been since December of 1981 - more than 40 years ago!
For us in real estate, that means that if people are having to spend so much more money on everyday items like groceries and gas and the cost of electricity for their homes, it becomes impossible for them to afford to buy homes at record-high sales prices as well.
Therefore, they raise mortgage rates to convince sellers to start dropping those home prices down to more reasonable levels. Since buying a house is included in the measure of the inflation rate, when prices come down, the inflation rate starts to come down as well.
If you are looking to buy a home, you should definitely be looking right now, but I would suggest if you have the time, watch the market for a few months. With mortgage rates now soaring above 5%, the number of buyers is going to start shrinking. That’s going to leave both new-home developers and individuals trying to sell their homes feeling a lot of pressure to drop prices in order to secure a buyer. With the information you’ve learned here today you will be more educated as a seller or buyer with the status of the housing market now so you can get better decision when you negotiate a deal as buyer or list a home as seller.
👔 Ron Cohen
📱 Call or Text us: 201-240-2991
🌐 Website: roncohen.kw.com/
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I would love to hear what do you have to say about the mortgage situation now.