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Housing market could be finding equilibrium despite higher interest rates

This is a home for sale in Mount Lebanon, Pa., on Tuesday, Sept. 21, 2021. (AP Photo/Gene J. Puskar)
This is a home for sale in Mount Lebanon, Pa., on Tuesday, Sept. 21, 2021. (AP Photo/Gene J. Puskar)
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Mortgage rates have climbed again in another blow to a cooling housing market that has been hurt by high inflation and the Federal Reserve’s subsequent crackdown, which have made it more expensive to buy a home.

The average interest rate for a 30-year mortgage sat at 5.55% on Friday, according to Freddie Mac data. Rates are nearly twice as high compared to a year ago but are down slightly from June, which were the highest since 2008.

Along with home values that have skyrocketed since the real estate boom over the last two years, higher interest rates have made it too expensive for some would-be buyers to purchase a home. Real estate groups have partially attributed six consecutive months of declines in home purchases to the cost brought on by interest rates approaching 6%.

The National Association of Home Builders has said the housing market is in a recession because of the Fed’s tightening policy.

The sharp drop in new home sales is another clear indicator that housing is in a recession,” said Danushka Nanayakkara-Skillington, NAHB’s assistant vice president for forecasting and analysis. “The combination of higher prices and increased interest rates are generating a notable slowing of the housing market.”

Mortgage rates generally track changes with the benchmark 10-year treasury yield and can swing up and down as investors take in more information about the economy.

While higher mortgage rates generally coincide with a decline in market activity, they aren’t indicative of a total collapse. They can also be a positive sign pointing to optimism about investment.

“If a year from now interest mortgage rates are back at 3.5%, that's actually probably going to be a deep recession, where home prices did collapse,” said Kevin Erdmann, a senior affiliated scholar at George Mason University’s Mercatus Center. “If mortgage rates a year from now are higher, say 6%, we're probably in a boom. The only way that could happen is residential investment increased, the pace of construction was able to increase, everyone's optimistic and it's probably a good enough market that everyone's happy and prices aren't collapsing, and construction is actually doing well.”

Even with rates being close to double what they were a year or two ago, they are still toward the lower end of historical norms. Some real estate groups are seeing signs of the market stabilizing.

"The ongoing sales decline reflects the impact of the mortgage rate peak of 6% in early June," said National Association of Realtors chief Economist Lawrence Yun. "Home sales may soon stabilize since mortgage rates have fallen to near 5%, thereby giving an additional boost of purchasing power to home buyers."

Housing starts, or construction of new, privately owned homes, dropped 9.6% last month to 1,446,000, the lowest level in 17 months. The lack of increase in supply is helping home prices remain high despite less demand from buyers.

Analyses of the U.S. housing situation have found the country is short millions of units. Supply chain snags and now increased costs have hampered the industry’s ability to build enough homes to meet demand.

Even with a decline in sales, builders have still been able to sell homes with relative ease as demand has outpaced output.

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“There are several months of this sort of what looks like a huge collapse in sales — several months of that would have to happen just for us to get to the point where the number of homes being constructed actually matches the number of homes that people are able and wanting to buy,” said Erdmann. “So, it's this weird situation where it looks terrible, but I actually think we have quite a bit of sort of wiggle room between supply and demand just to get things back to normal.”

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