Real Estate Markets Are Addicted to Easy Money
On Friday, residential real estate brokerage firm Redfin released new data on home prices, showing that prices fell 0.6 percent in February, year over year. According to Redfin’s numbers, this was the first time that home prices actually fell since 2012. The year-over-year drop was pulled down by especially large declines in five markets: Austin (-11%), San Jose, California (-10.9%), Oakland (-10.4%), Sacramento (-7.7%), and Phoenix (-7.3%). According to Redfin, the typical monthly mortgage payment is now at a record high of $2,520.
The Redfin numbers come a few days new numbers from the Case-Shiller home price index showing further slowing in home prices growth since late last year. The market’s expectation December’s the 20-city index had been -0.5 percent, month over month, and 5.8 percent, year over year. But the numbers came in worse (from the seller’s perspective) than was hoped. For December—the most recent monthly data available—the index ended up showing a month-over-month drop of -1.5 percent (seasonally adjusted), and a year-over-year gain of 4.6 percent (not seasonally adjusted).
By most accounts, the rapidly-slowing market faces headwinds thanks to rising interest rates, including the standard 30-year fixed mortgage, which is now back up over 6 percent. This puts homeownership out of reach for many first-time buyers, and is also a big disincentive for current owners to “move-up” into higher priced houses since any new home would come with a much higher mortgage rate than was available a year ago.
Not surprisingly, demand for new mortgages has plummeted. CNBC reported last week:
Mortgage applications to purchase a home dropped 6% last week compared with the previous week, according to the Mortgage Bankers Association’s seasonally adjusted index. Volume was 44% lower than the same week one year ago, and is now sitting at a 28-year low.
So, sales have fallen and, at least according to Redfin, prices are falling too. This is what we should expect to see in any environment where the real estate market is not being incessantly fueled by easy money from the central bank. After all, easy money for real estate markets had been the main story since 2009. In recent months, however, the Fed has allowed interest rates to rise while pausing efforts to add more mortgage-backed securities (MBS) to the Fed’s portfolio. Without those key supports from policymakers, the real estate market simpl
Article from Mises Wire