Housing market grinding to a halt? High mortgage rates bring sales and listings down

Climbing mortgage rates continue to slow the housing market, with both home sales and listings falling rapidly.

Existing-home sales declined for the eighth consecutive month in September, falling 1.5% month-over-month to an adjusted annual rate of 4.71 million, according to newly released data by the National Association of Realtors. Sales are down almost 24% compared to one year ago.

“The housing sector continues to undergo an adjustment due to the continuous rise in interest rates," which are nearing 7%, said NAR Chief Economist Lawrence Yun. “Expensive regions of the country are especially feeling the pinch and seeing larger declines in sales.”

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The median existing-home sales price rose 8% year-over-year to $384,800 in September, but it was also the third month in a row that prices declined after reaching a record high of $413,800 in June.

While the decline indicated a seasonal trend of prices trailing off after peaking in summer, the 7% decline from June to September was more than double the rate of decline during the same time-period in 2021, when it fell by 3.1%.

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Many Americans are staying put because they don’t want to risk losing the low mortgage rate theylocked in during the pandemic, says Redfin Economics Research Lead Chen Zhao.

Even though demand is slumping because of surging mortgage rates, prices are being propped up by inflation and a drop in the number of people putting their homes up for sale.

What’s happening with mortgage rates?

The Federal Reserve’s attempt to tamp down inflation by raising interest rates has caused mortgage rates to reach a 20-year high.

The average rate for a 30-year fixed-rate mortgage increased to 6.94% for the week ending Oct. 20, according to Freddie Mac's Primary Mortgage Market Survey. This time last year, the rate stood at 3.09%.

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Mortgage-purchase applications fell to their lowest level in 25 years, according to the Mortgage Bankers Association.

The current 30-year fixed rate is now well over 3 percentage points higher than a year ago, and both purchase and refinance applications were down 38% and 86% over the year, respectively, said Joel Kan, MBA’s Vice President and Deputy Chief Economist.

Housing market and mortgage rates

Homebuyers have lost 29% of their purchasing power as the average 30-year-fixed mortgage rate climbed from 2.65% at the start of 2021 to when it crossed 6.6%, according to Redfin.

Nationwide, about 60,000 home purchase agreements were called off in September, equal to 17% of homes that went under contract – the highest share on record aside from March 2020.

Homebuilder confidence fell for the 10th straight month in October, marking the lowest level since May 2020, after the pandemic hit the economy, according the National Association of Home Builders.

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“With rising interest rates, elevated inflation and worsening housing affordability, the housing market slump will likely continue well into 2023,” says PNC Financial Services Group senior economist Abbey Omodunbi.

New residential construction data for August from the Census Bureau showed that the number of houses approved for construction that are yet to be started registered at 290,000, slightly below the record-high 298,000 in July.

Housing inventory

Total housing inventory at the end of September stood at 1.25 million units, down 2.3% from August and 0.8% from the previous year. Unsold inventory sits at a 3.2-month supply at the current sales pace – unchanged from August and up from 2.4 months in September 2021.

“Despite weaker sales, multiple offers are still occurring with more than a quarter of homes selling above list price due to limited inventory,” says Yun.

Is a housing market crash coming?

Any coming housing correction will not be as dire as the 2007-09 global financial crisis in terms of magnitude, experts say.

In the years before the 2008 housing market crash, mortgage lenders made subprime loans to borrowers without verified income or adequate down payments while pushing risky loan products. Tough loan underwriting standards are the norm even with last year's rock-bottom interest rates.

This time around, household balance sheets appear in better shape, and excessive borrowing did not fuel the housing market boom. The prices rose because of high demand during the pandemic combined with low inventory levels and low mortgage rates.

Which housing markets will do well in 2023?

Midsize markets, which saw lower price increases and less of an affordability crunch than others, are poised to see the strongest combined growth in home sales and listing prices in the coming year, according to a report from Realtor.com.

With mortgage rates almost doubling since the beginning of the year and home prices continuing to inch up due to low inventory, affordability remains a big concern for buyers.

“Because these midsize markets didn't really surge to new degrees during the pandemic, they are still relatively affordable,” Danielle Hale, chief economist for Realtor.com.

Topping the list, according to Realtor.com are Hartford-West Hartford, Connecticut, followed by El Paso, Texas; Louisville, Kentucky; Worcester, Massachusetts; Buffalo-Cheektowaga, New York; Augusta, Georgia; Grand Rapids-City of Wyoming, Michigan; Columbia, South Carolina; Chattanooga, Tennessee; and Toledo, Ohio.

Latest housing market news

  • First-time buyers were responsible for 29% of sales in September, slightly higher than 28% from September 2021, according to NAR.

  • All-cash sales accounted for 22% of transactions in September, down from 24% in August and 23% in September 2021.

  • Individual investors or second-home buyers, who make up many cash sales, purchased 15% of homes in September, down from 16% in August, but up from 13% in September 2021.

  • Distressed sales – foreclosures and short sales – represented 2% of sales in September, a marginal increase from 1% in August 2022 and September 2021.

Swapna Venugopal Ramaswamy is a housing and economy correspondent for USA TODAY. You can follow her on Twitter @SwapnaVenugopal and sign up for our Daily Money newsletter here.

This article originally appeared on USA TODAY: Is the housing market grinding to a halt? Both sales and listings down