The Fed’s inflation battle has hit the housing market. Here’s what buyers need to know

The fate of the housing boom is on the minds of both homeowners and home buyers these days. Will recording home values ​​commemorate the crash that made the Great Recession so painful? Or will the rapid appreciation in prices be relieved by their fast pace?

No one knows – not even the most powerful central banker in the world. Fed Chairman Jerome Powell has acknowledged the sharp increase in mortgage rates. According to Bankrate’s national survey of lenders, they have gone up from 3% in August to 6% now.

“We know very well that mortgage rates have gone up a lot, and you’re looking at a changing housing market,” Powell said last week. “We’re watching to see what will happen. How much will it actually affect residential investment? Not sure. How much will it affect housing prices? Not sure. We’re watching this very carefully.”

What does this mean for home prices?

Housing economists do not expect a sharp drop in prices, at least not at the national level. After all, the supply of homes for sale remains at a record low. And while the boom in mortgage rates has somewhat dampened demand, demand still exceeds supply, thanks to a combination of very little new construction and strong home formation by a large number of millennials.

The National Association of Realtors said Tuesday that rising mortgage rates have slowed home sales. Still, the median price of homes sold nationally stood at a record $407,600 in May, up 14.8% from May 2021, and the list of homes for sale remains below the year-ago level.

“It’s still a very tight market,” Powell said during last week’s remarks to reporters. “Prices can go up for some time, even in a world where rates are rising. It’s a complicated situation.”

Powell: Buyers need a ‘reset’

The sharp rise in home prices in the last two years has made affordability a major challenge, especially for first time buyers. Unlike repeat buyers, first-time buyers do not create an equity cushion as prices move up.

“I would say that if you’re a homebuyer, or a young person looking to buy a home, you need to do a little reset,” Powell said.

While the Fed does not directly control mortgage rates, it does set the federal funds rate, a number that reflects economic reality and seeks to direct economic activity toward sustainable levels of growth. The Fed slashed rates to zero at the start of the coronavirus pandemic.

“The rates were very low for some time because of the pandemic, and when unemployment was 14% and the real unemployment rate was much higher, we needed to do everything we could to support the economy,” Powell said.

But as inflation has hit a 40-year high, the Fed has responded by raising rates three times in 2022 – including a 0.75 percent increase last week.

what can you do

How home buyers can tackle the still challenging market:

– Shop for a mortgage. Rates and fees vary significantly from one lender to another. Comparing at least three offers from competing lenders can save you thousands of dollars over the life of the mortgage.

– Look for low down-payment loans. For borrowers struggling to buy a home, monthly payments are just one hurdle. Coming up with another down payment. With US home sales for about $400,000, going down 10% means writing a check for $40,000. However, there is a possible solution in the form of mortgages backed by the Federal Housing Administration and the US Department of Veterans Affairs. Both FHA loans and VA loans have less heavy restrictions than traditional loans. While the standard down payment is 20%, VA loans are not required to reduce anything, and FHA loans have a minimum down payment of 3.5%.

– Consider a fixer-upper. For buyers frustrated by lack of inventory and rising prices, older homes can be a good compromise. In a Bankrate survey earlier this year, 21% of respondents said they would try this strategy. Of course, buying a fixer-upper means you’re working on a project, which brings uncertainty. No matter how careful you are about estimating your renovation budget, you can count on surprises—especially when material costs are volatile and construction labor is in short supply. Renovation experts say you should anticipate cost escalation in the range of 15% to 20% of your construction budget.

– Move to a more affordable area. Many buyers are facing the harsh reality that they can’t afford to buy in the neighborhood they really want. In some cases, buyers are deciding to exit the most challenging markets. Home prices are rising everywhere, but prices are especially visible in California. According to the National Association of Realtors, the average price of an existing home sold in the Seattle area during the first quarter of 2022 was $746,200. However, there are home prices in many major metro areas that are still affordable. These include Buffalo (average selling price of $202,300 in the first quarter), Philadelphia ($297,900), Louisville ($235,400), St. Louis ($216,700), Kansas City ($287,400) and Milwaukee ($298,800).

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