The spring home buying season isn’t what it used to be, thanks to the Fed

The spring home buying season isn’t what it used to be, thanks to the Fed

Spring is undeniably the best time to put your home on the market. The ideal weather shows the house in its best light and the timing makes it a more suitable season for people to move, especially with the end of the school year.

But the Federal Reserve is launching a plan for many potential homebuyers.

A few months ago, a rate cut, which would have helped lower mortgage rates, looked like a sure shot now that inflation continues to approach the Fed’s 2% target month after month.

That progress has been lost with various different inflation measures heating up again. This leaves central banks with few options other than keeping interest rates at their current multi-decade highs for longer, or potentially even raising rates.

All of that has caused the spring home buying season to end — and could spell trouble for the rest of the year.

“Higher rates restrict inventory,” Zillow senior economist Nicole Bachaud told CNN. “Some owners who locked in low rates during the pandemic have been reluctant to sell and give up those low monthly payments, especially in the most expensive markets where mortgage costs are more sensitive to rate changes.”

But it’s a bit of a chicken or egg situation, he said. “Buyers who faced a sharp rise in mortgage rates earlier in the year were slower to return to the housing market this spring. However, it is not clear whether they are waiting for lower interest rates or if they are looking at the overall affordability picture.”

Housing affordability, in general, is a result of the number of homes on the market. And homeowners who obtained low-rate mortgages when the Fed kept rates very low during the pandemic have little incentive to move and risk paying higher rates.

At the same time, if home prices fall but mortgage rates remain high, Bachaud said he suspects more people will buy homes. Right now, however, the average 30-year fixed rate is at its highest level so far this year and home prices are rising at their fastest rate in more than a year.

Higher rates don’t deter all homebuyers
Homebuyers who are more likely to sit on the sidelines this spring already own homes, said Sam Khater, chief economist at Freddie Mac. But first-time homebuyers who are “tired of high rents or have growing families have continued to buy in a rising rate environment,” he added.

Also, in certain parts of the country like Texas and Florida, new home construction is providing significant price relief, Bachaud said. That attracts more homebuyers to the market. In some cases, homebuilders have offered benefits to buyers such as buyout mortgages to incentivize people to move to neighborhoods that may be less developed than where existing homes are located.

How does this year look like?
The spring home buying season “largely determines how the year will turn out for the housing market,” Khater and his team of economists at Freddie Mac said in a recent report. Since 1999, more than a third of the year’s home sales have occurred between March and June on average, according to Freddie Mac data.

Since the Fed is in no rush to cut interest rates, Khater expects mortgage rates to remain elevated for a while longer. That will likely curb housing inventory as homeowners don’t want to give up the lower rates they have.

However, demand this spring was stronger than last year in terms of the number of people applying for mortgages from Freddie Mac. Taken together, all these factors are likely to put pressure on house prices, Khater and his team said in the report.

Zillow’s Bachaud also predicts home prices will rise higher this year, but no more than 2%.

“Our outlook depends on mortgage rates, which create their own seasonality,” he added. “If rates fall later this year, we may see a second boost to home sales later this summer or this fall.”

That’s unlikely to happen though. As of Tuesday, investors thought the first rate cut of the year would come in November, according to fed funds futures.

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