One economist I spoke to on Thursday was talking about “three pieces of bad news” about the housing market that came out this week: Sales of new homes were 4.7% lower in April than in March. Existing home sales were down about 2%. And homebuilder sentiment officially plummeted into “depressed” territory in May, marking the first time since November that the National Association of Home Builders' confidence index has fallen on a monthly basis.
It's easy to point the finger at high mortgage rates for all of this. According to Freddie Mac, the average rate on a 30-year fixed-rate mortgage rose above 7% again in mid-April, a level not seen since late last year. Rates have since edged down slightly.
The housing market has been sluggish with mortgage rates above 7%, as would-be buyers can't afford the high monthly payments and would-be sellers don't want to move and give up low mortgage rates.
“The housing market is in disarray right now,” said Robert Frick, an economist at Navy Federal Credit Union. “There are all kinds of dilemmas, and things are stuck. If one part isn't moving, another part isn't moving either.”
Flick expects the Fed to eventually cut interest rates, “hopefully later this year, but they'll need to be cut substantially,” he said.
How far would it need to fall to unfreeze the market?
“It's probably going to be around 5 percent,” Frick says. “If it's 5 percent, people with 3 percent mortgages will think, 'Yeah, great, I'm going to put my house on the market now.' They'll be more willing to buy because their monthly mortgage payment will be hundreds of dollars less.”
It will be a slow thaw at best: Construction has been sluggish since the Great Recession, and Frick said the nation's housing supply remains 4.5 million units below market needs.
Danushka Nanayakkara of the National Association of Home Builders said high home prices will also hinder a full recovery.
“Most are between $300,000 and $500,000, which is very expensive by historical standards,” Nanayakkara said.
Of course, some people looking for an affordable first home will figure out how to make it work.
“I didn't know much about real estate,” says Anthony D'Armiento, who and his wife just bought a midcentury modern home outside Portland, Oregon.
Though the décor was far from what they wanted, some creative math helped them lower their monthly payments. “One of the things that was new to me was that we were able to get a lower interest rate. We were able to get our interest rate down from 7.75 percent to 5.75 percent,” D'Armiento says.
Still, he said, “I was looking for a house that I could rent on Airbnb or something that I could rent.”
They plan to rent out the downstairs room to make extra money to pay the mortgage.
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