Are We Heading Into A Real Estate Market Crash?

Media headlines claim “High Inflation”, “Mortgage Rates Rising” and “Looming Recession”. Are we heading into a real estate market crash?

Our answer is “No”. yet it is not simple. Let’s explore the current real estate market conditions for the answer.

The real question is, “What is the Federal Reserve Really Up To in 2022?”:

Tip: Reading this will educate you about how mortgage rates actually rise instead of what you read in the media.

 

KEY TAKEAWAYS

• The Federal Reserve (Fed) wants to slow down inflation.
• The Fed will accomplish this by hiking interest rates during the rest of 2022.
• Feds reason that rising interest rates will eventually bring down home sales prices in 2023.
• The Fed worries about inflation so much that it is willing to risk the housing market, job losses, and recession to bring inflation down
• Yet, higher interest rates by the Fed do not automatically raise mortgage interest rates pegged to the U.S. Treasury 10-year bond yield.
• Mortgage lenders are free to fluctuate mortgage interest rates to keep the housing market from crashing.
• Read what the Fed chairman recently said about raising interest rates.
• In essence, the Fed chairman stated that reducing inflation will result in more job losses and a recession. It’s a price the Fed is willing to endure to stop runaway inflation.
• Thus, expect home prices to fall nationwide in 2023.

 

Are We Heading Into A Real Estate Market Crash?

 

October 2022 media reports claim “The Fed Wants a Housing Correction”. The Federal Reserve (Fed) keeps hiking interest rates. A Federal Open Market Committee (FOMC) meeting held on September 20 – 21, 2022 revealed these facts:

• Fed interest rates went up and will probably stay that way over the next year;
• The Fed raised the Federal Funds Rate (a short-term interest rate used by banks) that affects bonds and lending;
• In late September, the Fed raised the federal fund rate between 3% to 3.25%; and
• At the same time, the Fed released its Summary of Economic Projections of the federal funds rate possibly rising to 4.4% by the end of 2022.

 

Will This Mean Mortgage Rates Continue Rising?

Yes, but experts predict at a slow rate. That’s because mortgage lenders are forward-looking. The Fed rates hike in late September of 2022 was predicted by mortgage lenders. They expected the Fed rate hike several months before.

Federal funds rate does not dictate mortgage rates. According to Bankrate, mortgage rates are more closely tied to the 10-year Treasury bond yield than Fed rate hikes.

Know this: The Fed worries about inflation so much that it is willing to risk the housing market, job losses, and recession to bring inflation down (Source).

Fed chairman Jerome Powell held a press conference last September. He stated that inflation reduction is the Fed’s primary goal. Plus, he is willing to create economic pains to accomplish it.

In fact, during that press conference, Rachel Siegel of the Washington Post asked Powell about the Fed’s Summary of Economic Projections predicting unemployment to increase to 4.4% which could trigger a recession. Powell replied:

“We have always understood that restoring price stability while achieving a relatively modest decline, or rather increase, in unemployment and a soft landing would be very challenging, and we don’t know, no one knows whether this process will lead to a recession or if so, how significant that recession would be.” (Source)

Summary: That’s the Fed chairman stating that reducing inflation will result in more job losses and a recession.

Powell was also asked if the housing market will cool. Powell replied,

“What we need is supply and demand to get better aligned so that housing prices go up at a reasonable level, at a reasonable pace, and that people can afford houses again, and I think we, so we probably in the housing market have to go through a correction to get back to that place.” (Source)

What does Powell mean?

1. It’s pretty clear. The Fed will risk a recession, job losses, and a housing market correction to bring down inflation.
2. Thus, the Fed will aggressively fight inflation even if it hurts the economy in other areas like jobs and housing.
3. Therefore, the housing market is experiencing price reductions. Yet, prices are still higher than a year ago.

2023: Our housing market will face a test in the coming months knowing that mortgage rates will remain high. Yet, many experts predict that 2023 housing prices will go down making housing more affordable. (Source)

 

7% Mortgage Rates Are Here – Now What?

In October 2022 mortgage rates eclipsed 7% jeopardizing affordability. For a brief period, mortgage rates rose above 7% on 30-year fixed rates for the first time since 2002. Yet, according to Mortgage News Daily, they receded down to 6.8%.

This is a big increase from early 2022 when the average rates were 3.3%. This summer when the rates jumped to 5% many became worried. Now, look at where we are!

This is known as “seesawing mortgage rates”. This volatility worries homeowners, buyers, and investors. Doubling interest rates over a few months is a reason for concern.

While fixed-rate homeowners won’t see any changes in their monthly payments, it will affect those trying to sell. Home sellers dislike seeing decreasing demand and falling prices.

Rising mortgage rates hurt prospective home buyers and investors. Buying homes became more unaffordable.

 

Have questions?

 

How Rising Mortgage Rates Impact Home Buyers and Investors

 

Let’s compare mortgage rates over the past year to see the impact of the recent mortgage rate hikes.

Example: Late last year or early 2022 you bought a $300,000 home on a 30-year fixed mortgage with a rate of around 3%. You would’ve paid around $1,250 per month for your mortgage (not counting other costs like taxes, insurance, etc.). The same home at the current mortgage rate amounts to $2,000 per month.

This is a result of the Fed’s housing market correction. Making home buying unaffordable to most people.

Here’s another example. “A house hunter looking for a $500,000 home saw their potential total mortgage payment fall by $64,000 from July to August, and then jump by $118,000 from August to September.”

Rising interest rates make housing less affordable. Plus, rising interest rates reduce the number of new homes listed. When demand drops, so do supplies. This makes the price for home selling fall. This is known as the “locked-in” effect.

The recent seller’s market will turn into a buyer’s market. Already, San Francisco is seeing prices fall over 20% since its peak earlier this year. (Source)

 

Are We Heading Into A Real Estate Market Crash? – Conclusion

 

What does it take to declare a housing market crash? Experts agree that a decline of 20% or more becomes a housing market crash. So, are we heading into a real estate market crash?

Based on the facts presented above, we do not think there will be a real estate market crash soon.

Tip: The Fed is trying to accomplish a housing market correction from an out-of-control seller’s market into an affordable buyer’s market.

In time, this will make investing in real estate more affordable. Yet, the challenge for investors will become finding affordable capital to finance purchases.

Read our recent posts about relevant issues titled, “Is There A Housing Bubble?”.

 

Thinking of Selling or Buying a Home in San Diego?

 

Big Block Realty offers buyers experienced Realtors who know all the neighborhoods in San Diego County. We make it easier for you to find your dream home in the correct fitting neighborhood. Also, we help local home sellers with the best offering price and marketing support to make your sale easier and faster.

 

Choose The Best in the U.S. and San Diego County

 

Why the Best?

Top 50 in the U.S.: Big Block Realty is recognized as the 49th Best Independent Real Estate Brokerage in the U.S. in 2022 out of 106,000 real estate brokerages by

The Wall Street Journal partnering with Real Trends Rankings.

Best in San Diego: Big Block Realty is also recognized in 2022 as the best brokerage in San Diego for four straight years (2018 – 2021) by the LocalBest.com site.

Contact us today whether you want to buy a home in San Diego County or sell your home.

 

Steven Rich, MBA – Guest Blogger

 

 

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