Consider This from NPR - As Mortgage Rates Climb, A Hot Housing Market Cools

Episode Date: October 3, 2022

Higher mortgage rates are putting a damper on the U.S. housing market. Home prices are down and sales of existing homes have now fallen for seven months in a row.The ripples in the housing market are being felt as the Federal Reserve has been raising interest rates to fight inflation. And those higher borrowing costs mean that monthly mortgage payments have shot up. We hear from would-be buyers who say that soaring mortgage rates are pushing them out of the market. And we talk to NPR's Chris Arnold about how the Fed's moves are affecting buyers and sellers. In participating regions, you'll also hear a local news segment to help you make sense of what's going on in your community. Email us at [e-mail] more about sponsor message choices: podcastchoices.com/adchoicesNPR Privacy Policy

Support for NPR comes from NPR member stations and Eric and Wendy Schmidt through the Schmidt Family Foundation, working toward a healthy, resilient, secure world for all. On the web at theschmidt.org. Cheyenne Gordon describes the hunt for her first home as pretty painful, to the point of becoming pure comedy. Gordon is 28 and a high school math teacher in Seattle. She and her partner have recently been looking to buy their first home together. We were looking at a house that was about 650 square feet. Just to put that into perspective, that is the average size of a studio apartment. Was listed for $575,000. It sold in under three days and it sold for $125,000 over asking price. And that's what it was like in April. Now we can't look at houses that are

$575,000. That's because the interest rate for a 30-year fixed rate mortgage in the U.S. has soared to nearly 7%, the highest since 2008. The spike is in response to the Federal Reserve issuing its fifth rate hike in six months in an attempt to combat surging inflation. And those higher borrowing costs mean that monthly mortgage payments have shot up for buyers like Cheyenne Gordon, who are having to make big adjustments. At this point, she says she doesn't care about finding the perfect home. The home I can add stuff to and fill with things I love. The real important place is location. And what do you have access to from that home? Can I go buy like locally roasted coffee? Can I interact with people listening to live music somewhere? Those things are so much more important to me than how many people can I fit at my dining

room table? Or is it quartz versus marble counter tops? Location is also important for Makita Lewis, who wants to buy her first home somewhere in New York City. But she says that the New York City housing market is really hard to compete in right now. I've tried writing letters to homeowners saying like, hey, I'm a first time home buyer. Like, here's my story. I can't afford to outbid everyone who's offering you this, but here's my offer. Of course, that never worked. But I'll just say that, like, I've tried everything. In Colorado, 32-year-old Hilary Tala Rude Ho is a stay-at-home mom. She and her husband were on their way to getting their first home.

They signed a contract to build a new house in May of 2021. And as the completion date kept getting pushed back, they tried to lock in their mortgage loan rate in June. But they no longer qualified for the loan after interest rates had gone up. We were told we'd have to pay off my husband's credit card and have to have $100,000 down to even manage to purchase our townhome, which we were going to buy for $375,000. And $100,000 is way more than 20%. There's no way we had that. And because the family thought that they'd be in a

new house, they didn't renew their lease on their rental home. So Tala Root Ho, her husband and their two-year-old daughter are now living in income-restricted housing. We kind of don't have much of a choice. You can't afford to live here. You can't afford to move from here. Keon Pearson is 29, and he and his partner were able to successfully buy their first condo at the end of 2021, before interest rates rose.

I was actually really nervous towards the end of last year that we would enter a high-interest- rate world. Those nerves pushed Pearson to speed up his home search. Pearson and his girlfriend sold all of their stock investments to make a down payment on their Bay Area condo, which was listed at around $830,000. Our place has like, literally it has ocean views. Like it is actually like a beautiful, beautiful home on the top of a hill. It's amazing, and we got it for less than a million. Pearson says he and his partner now have a slightly longer commute. And he jokes that he bought a condo only to sleep and spend the majority of

his time at the hospital where he's a resident physician. But he knows how lucky they are. We couldn't afford our same property today, even though we only bought it like eight months ago. There's no question the U.S. housing market today looks very different from the frenzied market of a year ago. Sales of existing homes dropped for the seventh month in a row as of September. Rising mortgage rates are pushing some buyers out of the market, including on new home construction. And builders are breaking ground on fewer new homes than they did a year ago. All of these rumbles in the housing market follow rising interest rates.

And as painful as it is for would-be buyers, sellers, and builders, it's kind of by design. You see, the Federal Reserve is trying to bring inflation under control by raising the cost of borrowing. Fed Chairman Jerome Powell explained the policy and the rationale after the Fed issued its fifth rate hike in six months. We've had a time of a red-hot housing market all over the country where, you know, famously houses were selling at 10 percent above the ask before even seeing the house, that kind of thing. Housing prices were going up at an unsustainably fast level. So we probably in the housing market have to go through a correction.

Consider this. Earlier in the pandemic, home ownership was out of reach for many Americans as home prices surged in an overheated market. And now it's out of reach because mortgage rates have skyrocketed. The Federal Reserve says the market needs to go through a correction, but it's unclear what a correction would actually look like. From NPR, I'm Elsa Chang. It's Monday, October 3rd. This message comes from NPR sponsor, Sotva, the comfort company. Sotva luxury mattresses are sold online and priced at about 50% less than mattress stores.

Visit s-double-a-t-v-a-dot-com-slash-npr-today and save an additional $200. It's Consider This from NPR. In terms of who the winners and losers are right now in the housing market, it's not a great picture all around. Daniel McHugh is a senior research associate at Harvard University's Joint Center for Housing Studies. Sellers are back to kind of more realistic expectations. We're kind of past the days, in most places,

past the days where you're getting dozens of competing offers after the first open house, because there's just fewer people in a position to buy. Even with fewer people lining up, those who are eager to buy are finding sellers who are just as eager to get property off their hands. But he says those sellers are reluctant to lower their prices. Sellers, they know what the house next door sold for, you know, across the way sold for a few months ago.

And that's the kind of price that they're kind of expecting now. And unless there's a reason to kind of back off, sellers are reluctant to kind of lower that price. Last year, homebuyers were competing in a red-hot seller's market, having to move quickly and aggressively in bidding wars. That isn't the case so much anymore, with high interest rates on mortgage loans and rising home prices slowing down home purchases. Up until recently, I mean, prices were going up 30 to 40 percent in just two years, you know, because of those bidding wars. I talk about inflation, right? I mean, you know, okay, bananas cost more at the grocery store, but 30 to 40% in two years for a house. I mean, it's crazy. That's NPR correspondent Chris Arnold. I spoke with him about what it means

now that mortgage rates have risen in response to the Fed's effort to stamp out inflation. Mortgages anticipate where the Fed is headed with its rate hikes and where inflation looks to be headed. So they moved a lot very fast earlier this year. Now they're all the way up near 7%. They started at 3%. That's just a huge move on a $400,000 mortgage. That means $900 more per month on the mortgage payment. I mean, every month, nearly $1,000. And that's for a $400,000 mortgage. A lot of homes cost more than that, obviously. So the Fed is saying, basically, this is necessary medicine for the economy to cool inflation, but it's painful medicine too. And Jerome Powell, the Fed chairman, talked about this.

We have got to get inflation behind us. I wish there were a painless way to do that. There isn't. We have to get supply and demand back into alignment. And the way we do that is by slowing the economy. And you know, the pain here is people can't afford to buy homes and they really want it to, and some of them are stuck. And that means fewer homes are selling. Month after month now, sales are declining. It's the slowest sales pace in basically seven years. And that hurts realtors. It hurts mortgage brokers. So everything in housing is slowing down.

So different from a year ago. So Chris, who are the people right now who are most caught in a bind, would you say? Well, I've been talking to a lot of people trying to buy houses. And the ones who are most caught, I would say, are people who decided to buy new construction homes. So they weren't built yet, and they signed a thing that said, yes, I signed this contract. I agree to buy this house in six months or a year, whenever it's built. Well, there were pandemic delays, and then meanwhile, rates went from three to up near seven, and now some of them can't even qualify. One homebuyer I've been talking to is trying to buy a house

near Gainesville, Florida. Her name's Katrina Wooten, and she's got three kids and a good job as a nurse at the VA. So she saved up for a down payment and signed a contract to buy a new home for about $375,000. And just her whole family was really excited. So excited, especially my 14 year old, you know, he's going to be out of my house probably in a few years. And he's never really had like a nice house to live in. But with rates rising now, she's really not sure she can afford to buy that house anymore. And you can just hear, you know, they're driving by and they're visiting it and everybody's excited about it. And, you know, here's where she is now. I mean, I was having panic attacks over it because, of course, this is such a big deal

for me. And some people in this situation, too, they put down, say, a $50,000 deposit and they could lose that if the sale falls through, if they have to back out. So they're very scared. And it's just a very hard situation. Yeah. Well, we heard Powell earlier talking about housing prices going up at an unsustainable pace. And he was saying the housing market has to go through a correction. What does

he mean by that correction? Well, that's a good question. He didn't say exactly what he meant by correction, and it could mean a couple of different things. And mainstream economists are kind of split on this. Some think, look, prices may still rise, say, 2% nationally year over year, just slow down a lot. Others say, no, prices could be down like 5% or 6% year over year, say, a year from now, maybe more than that in some markets where prices really surge. But either way, almost nobody expects a major housing crash like we saw 15 years ago. Right. I guess that's mildly assuring.

It doesn't sound like we're headed to a 2008 type implosion of the housing market. But what would you say is different this time? Two big things are different. One is we have a housing shortage. There is not enough supply in terms of homes. That was very different last time. We had too many homes. So after the last crash, though, we didn't build enough homes for like a decade. And meanwhile,

the millennial generation, the biggest generation, they've settled down. They want to buy houses. And even now with such high interest rates and homes are selling pretty quickly after they get listed. They're on the market for about 16 days. That's a very fast pace. So those two things together, not enough supply and very strong demand. It's kind of econ 101. It's hard for prices to fall too much. And then the other thing is that this time around, people can afford their mortgages. And by that, I mean not people who are stretching right now this week with the very high interest

rates. But over the past five years, there's lots and lots of millions not people who are stretching right now this week with the very high interest rates, but over the past five years, you know, there's lots and lots of millions of people who bought homes where they bought at a low rate or refinanced and now they've got a two and a half percent mortgage or something and it's fixed, right? It's not adjustable. So for the next 30 years or whatever, they're going to have the same mortgage payment. And, you know, it's just very different than back before. So for years into the future, many, many, many, many American homeowners will have an affordable

house payment, which will stabilize things. So unless we have sort of a massive recession where many millions of people lose their jobs, it's just hard to see a lot of foreclosures being dumped out of the market. And it's just very, very different than 2008. So I imagine, you know, a housing market that has always presented disproportionate barriers for Black and brown homebuyers. I imagine that this current housing market is only that much harder for Black and brown buyers to break into. Are we seeing that?

Oh, yeah. You know, 100%. It was just, it was really sad. After the last crash, the African American homeownership rate was pushed back to where it was in like the 1960s. Now buying a house is less affordable than it's been in decades. And we know that African Americans and Latinos often don't have the same access to family wealth to help with the down payment. So this environment is just especially tough right now. So what do buyers and sellers need to know right now? What should they consider if they are in the market or thinking about entering the market?

Well, unless you're stuck in some kind of bind where you're going to lose 50 grand if you don't buy the house. For buyers, you don't want to buy into a frenzy. And in some ways, look, the pressure is off. It's not a great time to buy a house. Prices are still very high. Interest rates are very high. So just look, do your research on different neighborhoods and find a good first time home buyer program. You know, for sellers, prices are still very strong out there, but just don't price the house like the height of the frenzy three or four months ago. Price at a price that's going to sell today. That is NPR's Chris Arnold. It's Consider This from NPR.

I'm Elsa Chang. Support for NPR and the following message come from the Kauffman Foundation, providing access to opportunities that help people achieve financial stability, upward mobility, and economic prosperity, regardless of race, gender, or geography. Kauffman.org. Support for NPR and the following message come from Carnegie Corporation of New York, working to reduce political polarization through philanthropic support for education, democracy, and peace. More information at carnegie.org.