Interest rates are rising. Just a percentage point in an existing loan rate can make monthly mortgage payments jump, and price some buyers out of the market. Mortgage applications are down more than 15% compared to 2021, dropping 5% in May alone.
Since the recent rise in rates to nearly 6%, nearly 1 in 5 sellers nationwide have dropped their prices, according to real estate brokerage Redfin. Redfin also announced layoffs last week due to the slowing housing market.
“The housing market is in a downturn right now. It’s cyclical, and it just doesn’t support the number of employees we had before,” Chief Economist of Redfin, Daryl Fairweather, said.
As the brokerage firm noted, “The typical buyer with a 30-year fixed-rate mortgage is looking at a monthly payment of $2,514, up from $1,692 a year ago. But those who remain in the market may notice they face less competition from other buyers. Homes are more likely to sit on the market for a few weeks, compared to last year when they would go under contract within a week, and home prices are being bid up less often than they were earlier in the spring.”
Redfin Deputy Chief Economist Taylor Marr added, “The housing market isn’t crashing, but it is experiencing a hangover as it comes down from an unsustainable high.
“Housing demand has already cooled significantly to the point that the industry has begun facing layoffs,” he explained. “Rate hikes will further stretch homebuyers’ budgets to the point that many more may be priced out. While a lot of home sellers are already dropping their prices, more homeowners will likely decide to stay put now that the mortgage rate on a new home is significantly higher than their current one.“
One aspect of the higher interest rates and a lessening of mortgage applications is the impact on luxury homes, a significant part of the local market place.
Sales of luxury U.S. homes fell 17.8% year over year during the three months ending April 30, the largest drop since the onset of the coronavirus pandemic sent shockwaves through the housing market, according to Redfin. In fact, only two instances in the past decade have seen steeper declines—the three months ending June 30, 2020 (-23.6%) and the three months ending May 31, 2020 (-21.6%).
And it can happen quickly. While in April, homes in Pasadena, CA sold for 7.81% above asking price on average and was declared a “seller’s market,” meaning that there were more people looking to buy than there homes available, these days a significant number of homes in Pasadena have experienced price drops.
While a number of market factors remain strong, such as homes continuing to sell at above asking prices, mortgage payments have begun to rise dramatically while a slow arcing curve in pending home sales has begun to emerge.
Whether Pasadena can remain above the fray, even while some local home prices drop, remains to be seen.
“More than a decade of chronic underbuilding and millions of millennials moving into the homebuying stage of life have created a significant imbalance between housing supply and demand,” says Greg McBride, CFA, Bankrate’s chief financial analyst. “While rapidly rising mortgage rates may temper the demand somewhat, don’t expect home price appreciation to come to a halt. A more modest pace of appreciation is the likelier outcome.”
