Many prospective buyers and sellers have retreated to the sidelines as mortgage rates near 7% and home prices remain high, sending sales and new listings down, but some need to move now. Redfin’s economists advise on how to buy and sell in an uncertain economic landscape.
Home sales and listings are pulling back even further this fall than they were over the summer as mortgage rates continue their upward march and widespread economic volatility leaves would-be homebuyers and sellers rethinking their plans.
With rates nearing 7%, why haven’t home prices fallen from a year ago to meet low demand? Speaking of high rates, is it better to continue renting than to buy your first home? Should buyers consider adjustable-rate mortgages? Should prospective sellers list their home now before prices fall? Redfin economists answer these and other questions, and share their insights about the state of the housing market.
Mortgage rates have more than doubled over the last 12 months. Why haven’t home prices fallen?
The median U.S. home-sale price has fallen from its pandemic peak, but it’s still up 6% year over year. Prices have only declined from a year ago in a few U.S. metros, including San Francisco and Oakland, CA.
Taylor Marr, Redfin Deputy Chief Economist: There are two main reasons home prices haven’t dropped year over year. One is that supply has fallen in tandem with demand, and the other is that home-sale price data lags a few months behind what’s happening in the market in real time.
Daryl Fairweather, Redfin Chief Economist: Today’s buyers will become price data points in two to three months. If you put in an offer on a home today, the sale will close in 30 to 60 days, then it’ll take another few weeks to show up in the data.
TM: Pricing is very nuanced right now, though. Even if we could track sale prices in real time, they still wouldn’t be falling as much as we would expect. Home sales are down more than 30% from a year ago, but new listings are down almost 20% because prospective sellers are spooked by high mortgage rates, too, and a lot of them are staying put. The pullback in supply is keeping upward pressure on prices. There aren’t enough homes on the market to give buyers total control.
When will home prices fall year over year?
TM: In the next six to 12 months, prices are likely to fall year over year, possibly by double digits in some areas. They’ll still be higher than pre-pandemic levels, but a lot of homeowners will be unhappy that the value of their home has gone down. Some builders are already offering new homes in bulk to investors at discounted rates of 10% to 15% off what they had hoped to get. They probably planned pricing six months ago, and now those homes are nearing completion and builders are willing to take a loss to get rid of them. Businesses that sell homes, like builders, investors and iBuyers, are much quicker than individual homeowners to react to changes in the market, so this is a sign that home prices more broadly are about to come down.
Is the U.S. in a recession? If yes, how is the recession impacting the housing market?
TM: A recession is a sustained and broad slowdown in the economy. I don’t think the overall U.S. economy is in a recession yet because unemployment is still quite low, though we’ll probably dip into recession territory next year. Home sales have declined enough that it’s fair to say the housing market specifically is in a recession. But economic growth is already slowing, inflation is persisting and Americans are feeling gloomy about the economy. All of these factors have hit homebuyers hard. Combine that with the Fed actively trying to dampen consumer demand to fight inflation by hiking interest rates–causing mortgage rates to more than double in the past year, an unprecedented uptick–and the housing market has slowed significantly.
DF: If the overall U.S. economy does officially enter a recession, it may boost homebuying demand because the housing market is particularly sensitive to interest rates. The Fed’s rate hikes are a double-edged sword. They will probably get inflation under control sometime in 2023, but they’re also likely to dampen consumer demand and cool the economy. Once that happens, the Fed is likely to bring rates back down to encourage spending, which would push mortgage rates down. That’ll encourage buyers who had been sidelined by high rates, and it’ll hopefully motivate sellers to list their homes to take advantage of the new pool of buyers. Whether the housing market makes a speedy or gradual recovery depends on the extent of job losses and economic uncertainty that could come in a recession.
Chen Zhao, Redfin Economics Research Team Lead: The impact of an overall economic recession on the housing market also depends on which Americans are hit hard. The pandemic recession in early 2020 mostly impacted renters, so it didn’t ultimately slow the housing market. The Great Recession that began in 2008, on the other hand, was caused mostly by loose lending standards and a foreclosure crisis, which caused the housing market to plummet. A foreclosure crisis is unlikely today because lenders have upped their standards since 2008 and most homeowners would have equity in their home even if values dropped by 10% or so. Plus, declining values don’t impact homeowners unless they’re planning to sell soon.
What’s your advice for prospective homebuyers? Should they hold off and hope prices and mortgage rates come down, or swoop in now before rates potentially climb higher?
DF: Some people have no choice but to enter the housing market at an inopportune time due to various life circumstances like divorce, death, job relocation or a growing family. For people who are buying a home right now, make sure you don’t stretch your budget. Mortgage rates are high and inflation is causing prices of most other things to rise, too. Ensure you have a pad of savings to cover emergencies and that every dollar isn’t going to your down payment and monthly mortgage payments.
TM: Here’s what I’ve been telling friends. There’s more to the decision than just mortgage rates and where home values are headed. Those things are important, but a lot of other factors–like how long someone plans to stay in a home and their risk tolerance–matter, too. If someone is going to stay in a home for 10 years, it’s unlikely the home will lose value. Seven percent mortgage rates are a tough pill for a lot of people to swallow. But there is a silver lining to high rates: Competition is low and buyers have the opportunity to negotiate with sellers.
Can today’s buyers get away with a lowball offer? What are your other tips for negotiating with sellers?
TM: Look at homes that have been on the market for 30 or 60 days and consider making a low offer. Not everything is dictated by asking prices; buyers should account for the fact that home values are likely about to decline when determining their offer price.
Open communication between the buyer’s agent and the listing agent is key. Initiate an honest conversation about how to reach a mutually beneficial agreement, where the buyer can afford their mortgage payment and the seller unloads their home for a fair price.
Say you’re comfortable paying $475,000 for a home. If you believe home prices will decline by 5% in the next year, price that into your negotiations. Offer $475,000 on a $500,000 listing. When prices were soaring at the height of the pandemic and expected to grow 10% year over year, buyers often priced that into offering over asking price, and it also works the other way around. The seller may be motivated to get the home off their hands in case demand cools further.
While it’s increasingly common for sellers to cover the buyer’s closing costs, there are other ways to ease the burden on the buyer’s pocketbook. Negotiate on the terms of the offer and ask for concessions. For example, include an inspection contingency and ask the seller to cover the cost of necessary repairs. I also recommend buyers ask for a seller concession to help buy down their mortgage rate, which would mitigate some of the impact of higher rates.
So who should buy a home right now? Who should rent?
DF: House hunters who can pay all cash should consider buying. Mortgage rates don’t matter to them, and they can take advantage of homes sitting longer on the market to negotiate with a seller on price. But for most people, who can’t pay in cash, make sure you consider the local market. There are a few parts of the country, like the Midwest, where prices are generally stable and don’t react as much to larger economic forces. There’s a low chance of home values declining significantly in a place like Chicago or upstate New York, so buying in those places is less risky right now. Home values are likely to decline most in pandemic boomtowns like Phoenix, Boise and Austin; prospective buyers in those areas should be more cautious about entering the market right now.
TM: People who plan to stay in a home for 10-plus years are also good candidates to buy. If you’re holding onto a home longterm, the housing market’s ups and downs–and the value of your home going up and down–don’t impact your finances much. If you find your dream home and can afford the current monthly payments, consider going for it. Homes aren’t just about money; they’re also about enjoying where you live.
CZ: It nearly always makes more sense to rent if it’s a short-term living arrangement or you need flexibility to move at a moment’s notice. But now renting makes financial sense for a bigger portion of the population. Prospective first-time buyers who don’t have cash for a big down payment may continue renting because they don’t want a huge mortgage and the risk of sinking underwater when a recession is looming. Also consider how you’re putting your money to work: Renting makes more sense if you can put what you would have used for a down payment into another investment that’s likely to grow in value.
Renting is more expensive than ever, too. What’s your advice for prospective renters?
Rental payments have surged since the pandemic started, with the typical asking rent increasing tremendously in metro areas like Austin, Nashville and Seattle.
TM: The good news for prospective renters is that rent growth slowed for the fourth-straight month in September and I expect it to slow further next year. It’s possible that asking rents could decline in some areas. That’s partly because of new supply, with a lot of new construction and many homeowners choosing to become landlords instead of selling. If you can, wait a few months to move into a new rental.
CZ: Consider trying to negotiate the price down or asking for some concessions.
Should buyers consider using an adjustable-rate mortgage or a 2-1 buydown instead of a 30-year fixed mortgage to secure a lower rate? What about taking a high rate now with the hope of refinancing in the future?
Adjustable-rate mortgages often come with lower interest rates, but they’re risky because the rate resets after a fixed period of time. A 5/1 ARM, the most common type of adjustable-rate mortgage, is a loan in which the interest rate is fixed for the first five years and then adjusts once a year for the remainder of the loan term–typically 30 years. 30-year fixed mortgages are currently at 6.94%, while 5/1 ARMS are at 5.81%.
A 2-1 buydown is a mortgage agreement where homebuyers and/or sellers pay to provide lower interest payments for the first two years of a loan. The agreement typically provides a low interest payment for the first year of a loan, a slightly higher rate for the second year and the full rate for the remainder of the loan term.
CZ: After the 2008 foreclosure crisis, lenders made ARMs less risky. Even though the rate resets after the fixed period, there’s now typically a cap on how high it can go. It’s also more difficult to qualify for an ARM, which limits the number of people who can get them and limits the overall risk.
TM: Think about your long term plans. If you’re planning to stay in a home for five years or less, ARMs are a good option. “Adjustable” is in the name, but it is fixed for a handful of years. But if you’re buying a forever home, ARMS are riskier because the rate–and your monthly payment–could go up in five years.
CZ: A 2-1 buydown can be a good deal, but do the math before you commit to it. Make sure the amount you’re paying to buy down the first two years of interest payments is worth it. And remember that after two years, you’re responsible for the full loan and interest payment. If you can’t afford the full monthly payment now and you don’t foresee your finances increasing, think twice.
DF: For people hoping to refinance in the future, I do think rates will come down eventually. Historically, most people who purchase a home have been able to refinance for a lower rate within five years, given the decades-long downward trend in interest rates.
TM: Refinancing is expensive. It typically costs 2% to 5% of the value of your loan, which can equal tens of thousands of dollars. Calculate whether eventually refinancing will be worth the interest savings over time.
What’s your advice for prospective sellers? Should they wait to list until mortgage rates drop?
DF: For some homeowners, like retirees downsizing or people moving to a more affordable area, now is still a fine time to sell. It really depends on what stage of life you are in, and whether you are ready to cash out. There are also circumstances where you could wait to sell. Maybe you got a new job that’s bringing you across the country. Consider renting out your home instead of selling right away. You can cash in on high rental demand and wait to sell until prices potentially rise again in a year or two.
TM: If you need to sell now, be open to negotiations, communicate with the buyer’s agent and work with the buyer to get to their ideal monthly mortgage payment. There may be concessions that will make the home you’re selling–and the price you want–attractive to both parties. For example, sellers can consider paying for closing costs and/or helping the buyer buy down the mortgage rate.
CZ: If you’re a seller, you’re often also a buyer. Weigh everything together. It’s impossible to time the market perfectly, but one great time to sell and buy is right when mortgage rates start dropping and demand starts coming back. So this could be an opportunity for people who have time and flexibility to watch the market like a hawk and be ready to move when there are signs conditions are changing.
TM: Demand could come back sooner than we expect because buyers may get used to higher rates. When people were used to 3% rates, a 5% rate sounded miserable. Now that rates are nearing 7%, a 5% rate seems like a deal. If rates go down to 5.5% in the next six months, that may feel good to buyers and improve demand. We saw that over the summer when rates dropped from around 6% to around 5% briefly and demand bounced.
What’s your advice for people who find themselves obsessing over the current housing-market downturn and rising mortgage rates?
DF: A lot of prospective sellers are bummed because they missed a golden opportunity to sell. But look back two years, five years or 10 years and appreciate how much your home has gone up in value. Don’t compare to six months ago. And if you bought your home in the last two years, you probably have a low mortgage rate that’s keeping your monthly payments down.
TM: For most homeowners, ups and downs in the market don’t mean much, except on paper. Think big picture. Take a step back from looking at daily, weekly and monthly movement.
DF: If you’re thinking of buying, talk to a lender. Tell them your monthly budget and work out what your actual costs will be. Get some hard numbers. How low will rates need to go, and/or how low will home prices need to go, to reach your ideal budget? Is there a way to stay within your ideal budget right now by using the right combination of down payment, loan type and possibly seller concessions?
CZ: Remember that you’re not a speculator. You’re not an investor. You’re a homeowner or a homebuyer. Even investors don’t hit the peaks and troughs of the market perfectly, and you certainly don’t need to. Yes, your house can be an asset, but your primary goal is providing a place for your family to live.
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