sales, and on a year-over-year basis existing home sales have been lower than the prior year for the last 12 months. Pending home sales, according to the latest report from the National Association of Realtors (NAR), have been down on a year-over-year basis for 13 consecutive months. New home sales have been lower than the prior year in 12 of the past 13 months. California home sales— considered by some to be a bellwether of the country’s housing market—were down 15% year-to-date. The Mortgage Bankers Association (MBA) reported that mortgage purchase loan applications were trailing purchase loan applications in both 2019 and 2021 by more than 20%. Consumer confidence and builder confidence scores were at or near record lows. Given all this, it was almost inevitable the housing market would slow down from its frenetic pace of the past few years and gradually return to something a bit more normal as we move through 2023. BLAME INFLATION. OR THE FEDERAL RESERVE. OR BOTH. Faced with high inflation rates— the highest in over 40 years—it could no longer reasonably term as “transitory,” the Federal Reserve announced it would aggressively use all the tools at its disposal to get rates under control. For all intents and purposes, this meant raising the federal funds rate to slow down the economy. It also meant unwinding its
First-Half U.S. Foreclosure Activity by Year
January-to-June Foreclosure Activity (Properties with Foreclosure Filings)
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position in the bonds market, where it held more than $2 trillion in mort- gage-backed securities, roughly 30% of the market. Both of these actions generally lead directly and indirectly to increased mortgage rates, and this case was no exception. Interest rates on 30-year fixed-rate loans rose quickly and dramatically. According to Freddie Mac, the 2-point jump in rates was the biggest increase since the turn of the century, and the largest increase since the early 1980s. And while mortgage rates in the 5%-6% range were still lower than the 25-year average, the percentage increase—with interest rates on mortgage loans virtually doubling—was largely unprecedented. If it was the Federal Reserve’s intention to hit the brakes on the housing market, it succeeded in its mission almost immediately. Affordability increasingly had been an issue for prospective homebuyers
due to escalating home values, but Fed policies intended to bolster the economy during and after the COVID‑19 recession ushered in historically low mortgage rates ranging between 2.5%-3% on a 30-year mortgage. These low rates made it possible for buyers to purchase and afford a home even as prices increased by nearly 20% a year. But this year’s sudden surge in finance costs ripped the Band-Aid off home prices, and the housing market immediately started bleeding. Although demand drivers had been showing signs of weakness for months, real-time metrics showed just how quickly and powerfully higher interest rates affected the market: Existing home sales in June were off 15% from the prior year. New home sales in June were at an annualized rate of 590,000 and are likely to be revised downward.
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