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Real estate inflation storm: when will prices calm down? | Smart Change: Personal Finances

Natalie Campisi – Forbes Advisor

Anyone who has dabbled in the housing market in the last couple of years has probably been through a whirlwind. The average sale price of a home – at half a million dollars in the first quarter – was the highest on record; housing offer is close to historic lows; and interest rates reach highest weekly increases in decades.

Then came the final element of this perfect storm: inflation.

United States consumer price index (CPI) rose to 9.1% in June, the largest annual increase since November 1981, according to the Labor Department. The Federal Reserve raised its federal funds rate in an attempt to rein in rising inflation, which indirectly pushed mortgage rates even higher.

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But as the cost of property, housing and mortgages rises, many people are beginning to turn away from buying a home. In June, some 60,000 home purchase agreements were cancelled, marking the biggest vacuum in housing contracts since Covid-19 hit in the spring of 2020, according to analysis by Redfin. With fewer people eager to buy, sellers are likely to be forced to lower prices to a more normalized level, some experts say.

“The cost of mortgages has almost doubled, significantly slowing home sales. So far, we’ve seen a 20% drop in home sales and more to come,” says Ken Rosen, president of the Fisher Center for Real Estate & Urban Economics at UC Berkeley’s Haas School of Business. .

Housing Predictions: House Price Growth Will Slow, But Inflation May Not

Nationally, house prices continue to climb. However, prices are starting to fall in some markets. Some experts say this could indicate headwinds in the housing market are beginning to dissipate.

In 97 of the 100 largest U.S. markets, the annual rate of home price appreciation fell more than a full percentage point in May from the previous month, according to Black Knight, a real estate data and analytics firm. .

Many Americans also predict that home price growth will soon deflate. The median expected change in house prices for next year fell to 4.4% in June, from 5.8% a month earlier, according to the New York Fed’s latest consumer expectations survey. This is the series’ lowest reading since February 2021.

Consumers’ outlook on inflation is also bleak in the latest survey results. Consumers’ one-year inflation expectations rose to 6.8% from 6.6% in May, while their three-year inflation forecasts fell to a more manageable 3.6%.

“Because of the higher costs, I think consumers are more sensitive to what portion of their budget is spent on housing,” says Danielle Hale, chief economist for real estate agent.com. “With housing costs being the largest category, households that can cut here can achieve significant overall savings, but market conditions for buyers and renters make this very difficult to do.”

Where are house prices going

Summer is traditionally one of the busiest times for buying a home, as parents want to find a home before school starts and hours are much more open than when classes are in session. But this summer season is showing signs of cooling as fewer buyers are in the market for a home.

According to the Redfin Homebuyer Demand Index, which calculates demand for home visits and home buying services from Redfin agents, demand is down 15% from a year ago over the past year. the week ending July 3.

Metro areas like Denver started the year strong with year-over-year price growth hitting 23.7% in March, according to the Case-Shiller index, but demand is waning.

“We can say with certainty that there is a decline in the buyer pool. We are seeing an increase in sitting inventory,” says Bret Weinstein, CEO of Denver-based Guide Real Estate.

Pending home sales fell 13% year-over-year for the four weeks ending July 3, the biggest drop since May 2020. But home prices are still high, and so are interest rates, so it may take time for prices to reflect the slowdown in demand.

“Rising mortgage rates on top of huge price gains should keep buyers on the sidelines,” says Daniel Broxterman, assistant professor of real estate at Florida State University College of Business and academic director of the FSU Real Estate Center. “If no additional new homes were built, it would take about eight months for the current new stock for sale to sell. This is a big change from last summer when stocks were around three months old.

For cash buyers, inflation could be a good thing

If inflation continues to drive up mortgage rates and drive away homebuyers who need mortgages, cash buyers unaffected by high loan costs will face less competition and to more inventory. And since real estate is generally a course hedge against inflationputting money into a house is a way of spending money on an asset that appreciates over time.

It also means that investors will likely continue to buy single-family homes, as many do not rely on financing to purchase real estate. Investors’ share of all single-family home purchases in February 2022 was 28.1%, the highest since 2011, when CoreLogic began tracking.

“Inflation hasn’t deterred investor interest in housing significantly,” says Susan Wachter, professor of real estate and co-director of the Penn Institute for Urban Research. “First-time home buyers, however, are being hit hard by higher borrowing costs and required down payments, and are shrinking their purchases.”

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