The Fed's Inflation-Fighting Tactic: A Cooling Effect on the Housing Market

The year started with the Federal Reserve's inflation-fighting tactics effectively cooling down the hot pandemic housing market. But what does the future hold? Let's find out. For the first time in more than a decade,...

The year started with the Federal Reserve's inflation-fighting tactics effectively cooling down the hot pandemic housing market. But what does the future hold? Let's find out.

For the first time in more than a decade, home prices dropped year-over-year in February. This drop was attributed to the consecutive interest rate hikes by the Federal Reserve, which led to mortgage rates more than doubling, resulting in decreased affordability. However, the downward trend in prices was short-lived, as the median price of a home increased for two consecutive months in March. In April, it is projected to increase for a third month in a row, albeit 2% lower than the previous year.

One significant factor contributing to the strengthening of home prices and the decrease in sales volume is the lack of housing inventory. The combination of job gains, limited inventory, and fluctuating mortgage rates has created an environment of push-pull housing demand. While home sales are bouncing back and forth, they remain above recent cyclical lows.

What does the housing market have in store? Experts weigh in Caption: What does the housing market have in store? Experts weigh in.

Where are home prices headed?

Usually, high mortgage rates prompt house prices to trend downward. However, the restricted housing supply has prevented this downward trend from taking hold. Insufficient supply combined with increased demand has resulted in buyers competing and bidding up prices. The dynamics of affordability will depend on mortgage rates and the supply and demand dynamics fueling house price appreciation, which will vary in each market.

According to Jeff Taylor, founder of Mphasis Digital Risk, the current situation makes it tough for homebuyers. With median home prices above $380,000 and elevated mortgage rates, buyers are finding it challenging to qualify for purchase prices, especially if their income is below $100,000. However, Taylor expects rates to drop and for inflation to wane in the coming months, making buying more attractive.

No return to typical seasonality in the market

As the economy faces uncertainty in the coming months, prospective homebuyers are expected to be more opportunistic rather than following traditional seasonal market trends. Volatility in mortgage rates, dependent on upcoming Federal Reserve meetings and economic data, will influence buyers' decisions. Many will try to make offers on homes when they see rates dip. This year, as a result, we should expect less seasonality than prior to the pandemic.

More sellers returning to the market

While inventory will remain low this year, we can expect to see more sellers who were previously on the sidelines listing their homes for sale during the summer and fall. Low mortgage rates have discouraged existing homeowners from making discretionary moves. However, some people have to move, and others may decide to move for various reasons. The recent uptick in new home construction has also provided more opportunities for move-up buyers who were previously staying put due to a lack of options.

New Home Construction

Concerns about the instability of regional banks impact builder and land developer financing. Lending conditions for builders have tightened, leading to higher interest rates for development and construction loans, threatening housing supply. As the Federal Reserve cuts the federal funds rate, there is hope for lower rates in the future, but this is not expected to happen until later in 2024. This delay may suppress land development and pose risks in case of a home building rebound in 2024.

In conclusion, the Federal Reserve's inflation-fighting tactics had an initial cooling effect on the housing market. However, various factors such as limited inventory, fluctuating mortgage rates, and demand dynamics continue to shape the market. Homebuyers should stay optimistic and consider getting pre-approved by lenders. While uncertainty persists, the market is likely to deviate from typical seasonal trends, and more sellers are expected to enter the market. For now, it's a waiting game as we navigate through the ever-changing landscape of the housing market.

Disclaimer: 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.

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