Housing has become increasingly unaffordable for millions of Americans – house prices and mortgage rates continue to rise (see the lowest rates you can currently qualify for here). That’s why we spoke to Mark Fleming as part of our series in which we ask prominent economists and real estate professionals what they think about the housing market. Fleming – First American Financial Corporation’s chief economist for titles, settlement, real estate data and risk solutions – has analyzed and forecasted the real estate and mortgage markets for 20 years. Before becoming chief economist at First American, Fleming developed insights and analytical products for CoreLogic and valuation models at Fannie Mae, and today his research expertise spans 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
Though they’re significantly higher than three months ago, which reduces purchasing power for homes, they’re about 6% for a 30-year fixed-rate mortgage, which Fleming says is far from high. “Mortgage rates are higher, but not high by historical standards,” says Fleming. He’s right: This chart from the St. Louis Fed shows the trajectory of mortgage rates since 1975. (See the lowest rates you might qualify for here.)
Affordability is increasingly a challenge for shoppers
Real estate prices have risen rapidly in the last two years. According to data from the National Association of Realtors, the median selling price for an existing home is up 17% year over year. “This is important because the purchasing power of homes has been virtually impossible to keep up with and consequently affordability has declined,” says Fleming.
Fleming says that, as measured by many of the home price indices reported in the media, house price increases have a significant lag, sometimes as much as six months. “It will be a few months before home price indices reflect how prices have responded to the surge in mortgage rates in the second quarter,” Fleming said.
Prepare for slower home price growth
But just because affordability is a challenge doesn’t mean house prices will fall. Fleming says his research shows that during periods of rising mortgage rates, like the one we’re experiencing now, home sales tend to decline, but home prices in general don’t. “Less sales and less price increases are to be expected,” says Fleming.
The housing market is cooling off
Monitor inventory levels and seller discount amounts for deals. “These are the leading indicators of where prices are headed and how the rise in mortgage rates has affected demand. More inventory and more price cuts by sellers signal a cooling market,” says Fleming. For sellers, this means a reset in expectations of how quickly their home will sell. “Mere days at the market were never normal. In fact, the old adage used to be that sellers should normally expect it to take up to 3 months for their home to be sold on the market. Of course, we’re still a long way from that, but sellers should expect it to take longer to sell their home. For buyers, expect less fierce competition when buying a home,” says Fleming. (Here are the lowest fares you may qualify for.)
Consider an ARM and be a smart buyer
Given the current market, Fleming says it’s easy to lose focus when mortgage rates and other real estate dynamics are shifting. “The reality is that some basic steps remain important and do not differ significantly from each market. Look for the best mortgage and in a market of rising interest rates, look for adjustable rate mortgages to take advantage of lower interest rates. Make your decisions based on home as a shelter rather than a return on investment, and be patient,” says Fleming.