Housing Market Doesn't Look so Hot After All

The 30-year fixed mortgage reached an average of 6.32% in the seven days ended Feb. 16, the second straight rise.

Plenty of excitement coursed through the real estate market in the last few weeks, as declining mortgage rates sparked talk of a rebound in sales.

But housing-market enthusiasts may want to hold their horses a bit. Mortgage rates are going back up, as the Fed looks set to keep interest rates “higher for longer.”

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Mortgage rates increased for the second week in a row during the seven days ending Feb. 16. The 30-year fixed mortgage rate hit an average of 6.32%, according to Freddie Mac, rising from 6.12% a week earlier.

The rate peaked at over 7% last November. It then slid amid expectations the Fed would go lighter on its rate hikes. But now, the scenario has reversed again.

“The economy is showing signs of resilience, mainly due to consumer spending, and rates are increasing,” said Sam Khater, chief economist at Freddie Mac. “Overall housing costs are also increasing and therefore impacting inflation, which continues to persist.”

Housing Costs Surge

Shelter costs, which account for about a third of the consumer price index, rose 0.7% last month. That’s 8.7% annualized.

Meanwhile, housing starts slid for the fifth straight month in January to the lowest level since June 2020.

New home building fell 4.5% last month to a 1.31 million annualized rate. The five-straight monthly decline was the longest streak since 2009.

Housing bulls got excited after the National Realtors Association (NAR) reported three weeks ago that pending home sales, based on contract signings, rose 2.5% in December from November.

“This recent low point in home sales activity is likely over,” NAR Chief Economist Lawrence Yun said Jan. 27. “Mortgage rates are the dominant factor driving home sales, and recent declines in rates are clearly helping to stabilize the market.”

Bearish Housing Data Abounds

But that was before the latest rise in rates. And pending transactions still dropped by 33.8% in December from a year earlier.

Existing home sales slid for the last 11 months of 2022, dropping 1.5% in December from November and a hefty 34% compared to a year earlier.

The median existing-home sales price fell 1% in December from November to $366,900, though it was still up 2.3% from December 2021. The price peaked at a record $413,800 in June.

With rates rising, those of you thinking of buying a home might want to hold out for lower prices, especially if your rent has stopped rising.

For those of you interested in buying real estate investment trusts, figuring out what to do is tricky. REIT prices fell sharply in 2022.

But the FTSE Nareit All Equity REIT index already has rebounded 8.99% this year. And with interest-rates likely headed higher, REITs may come back down.