Housing has become increasingly unaffordable for millions of Americans – with house prices and mortgage rates continuing to rise (see the lowest rates you could qualify for now here). So, as part of our series where we ask leading economists and real estate professionals for their views on the housing market, we spoke to Mark Fleming. Fleming — the chief economist at securities, settlement, real estate data and risk solutions firm First American Financial Corporation — has analyzed and forecasted the real estate and mortgage markets for 20 years. Prior to becoming Chief Economist at First American, Fleming developed analytical ideas and products for CoreLogic as well as valuation models at Fannie Mae and today his research expertise includes real estate and urban economics and mortgage risk. So we asked Fleming: what do today’s buyers and sellers need to know about the housing market?
Mortgage rates are higher, but they’re still not high
Although they are significantly higher than three months ago, which reduces the purchasing power of a home, they are around 6% for a 30-year fixed rate mortgage, which, according to Fleming, is far from high. “Mortgage rates are higher, but by historical standards they’re not high,” says Fleming. He’s right: This chart from the St. Louis Fed shows the mortgage rate curve since 1975. (See the lowest rates you might qualify for here.)
Affordability is increasingly a challenge for buyers
Home price appreciation has been rapid over the past two years. In fact, according to data from the National Association of Realtors, the median selling price of an existing home is up 17% from a year ago. “It’s important because it’s been virtually impossible for purchasing power to sustain itself and as a result affordability has gone down,” Fleming says.
Fleming says home price appreciation, as measured by many house price indices reported in the media, has a significant lag, sometimes up to six months. “It will be a few more months before house price indexes reflect how prices reacted to the rapid increase in mortgage rates in the second quarter,” Fleming said.
Prepare for slower house price growth
But just because affordability is a challenge doesn’t mean home prices will go down. Fleming says his research shows that during periods of rising mortgage rates like the ones we’re experiencing now, the number of home sales tends to decline, but home prices generally don’t. “Less sales and less price appreciation are the expectations,” says Fleming.
The housing market is cooling
Monitor inventory levels and the amount of seller price reductions on listings. “These are the main indicators of price developments and the impact of rising mortgage rates on demand. More inventory and more seller price reductions signal a cooling market,” says Fleming. For sellers, this means a reset of the expectation of how quickly their home will sell. “Mere days on the market have never been normal. In fact, the old saying goes that sellers should generally expect their home to take up to 3 months on the market to sell. Of course, we are still a long way off, but sellers should expect it to take longer to sell their home. For buyers, expect less competition to buy a home,” says Fleming. (See the lowest fares you could qualify for here.)
Consider an ARM and be a smart shopper
Given the current market, Fleming says it’s easy to get lost amid shifts in mortgage rates and other housing dynamics. “The reality is that some basic steps are still important and are not much different from any market. Shop around for the best mortgage and, in a rising rate market, look for adjustable rate mortgages to benefit of a lower rate. Make your choices based on the house as shelter rather than an opportunity for return on investment and be patient,” says Fleming.