A record share of home sellers have dropped their prices amid two-decade-high mortgage rates, with many of them concerned about residential property values potentially going down before they can cash in on the sale.
In the four weeks ended Oct. 29, almost 7 percent of homes for sale registered a price drop, the highest percentage on record, according to a Nov. 3 statement by real estate brokerage firm Redfin. Mortgage rates have hit “their highest level in 23 years,” cutting “deep into buyers’ budgets” and forcing some sellers to “lower their asking price to make up for high interest rates on monthly payments,” the firm stated.
The price drop by sellers follows a 0.3 percent year-over-year increase in new listings of homes for sale for the four weeks ended Oct. 22—the first such increase since July 2022.
Redfin speculated that more homeowners are putting their homes on the market because many of them are accepting the fact that rates may not decline meaningfully anytime soon.
“Some people are selling right now because they’re concerned home values will go down, though that’s definitely not a foregone conclusion,” Ali Mafi, a Redfin Premier agent in San Francisco, said in an Oct. 26 report by Redfin.
“Others are noticing an uptick in demand and testing the waters. My best advice for homeowners who are selling right now is to be realistic: Even though there are a few more buyers out there, this isn’t 2021. Price your home fairly so it will sell as fast as possible.”
Even though sellers are dropping prices, the overall home sales price is still up by 3 percent compared to a year ago. This is because sales price data are a lagging indicator and only reflect deals that went under contract a month or two ago.
As such, Redfin expects the growth in sales prices to slow down in the coming months as it reflects October data.
Redfin company agents are reporting a mismatch between the high expectations of sellers and the reality of buyers’ budgets.
Seattle Redfin Premier agent Patrick Beringer pointed out that some sellers are pricing too high “because they have FOMO [fear of missing out] after their neighbor’s house sold well over asking price two years ago.”
High Mortgage, Low Affordability
According to a Nov. 1 statement by the Mortgage Bankers Association (MBA), mortgage applications fell for the third straight week in the week ended Oct. 27.Joel Kan, MBA’s vice president and deputy chief economist, pointed out that the “impact of higher rates continued to be felt across both purchase and refinance markets.” Mortgage applications for purchasing a home fell to their lowest level since 1995.
The average interest rate on a 30-year fixed-rate mortgage was 7.76 percent for the week ended Nov. 1, based on data from Freddie Mac. Two years ago, the interest rate was just 3.09 percent.
“The 30-year fixed-rate mortgage paused its multi-week climb, but continues to hover under 8 percent,” Sam Khater, Freddie Mac’s chief economist, said in a Nov. 2 statement.
“The Federal Reserve again decided not to raise interest rates, but have not ruled out a hike before year-end. Coupled with geopolitical uncertainty, this ambiguity around monetary policy will likely have an impact on the overall economic landscape and may continue to stall improvements in the housing market.”
The combination of high mortgage rates and high home prices has created a massive affordability challenge for prospective buyers.
Data from the National Association of Realtors showed that the price of a median-priced existing single-family home jumped from $300,200 in 2020 to $413,500 in August this year. During this period, the mortgage rate has more than doubled from 3.17 percent to 7.15 percent.
As a consequence, the monthly mortgage payment for a median-priced home has surged from $1,035 to $2,234. Meanwhile, the income required to qualify for the mortgage has risen from $49,680 to $107,232.
In an interview with NerdWallet, Chen Zhao, head of economic research at Redfin, pointed out that the economy, especially the job market, has been “very resilient” despite the U.S. Federal Reserve hiking rates at the “fastest ever rate.”
“As a result, investors are now expecting that the economy is going to avoid a recession and remain very strong for longer,“ he said. ”And that means that the economy can sustain higher mortgage rates for a longer amount of time.”
At present, the uncertainty about the economy is “unusually high,” he said.
“Maybe the most plausible forecast would be to say that rates are probably going to stay in this range for the near term or at least in the foreseeable future,” he said.
According to Melissa Cohn, New York-based regional vice president and mortgage banker at William Raveis Mortgage, people who can afford to buy a home right now despite the elevated rates may be better off going ahead with the purchase to avoid the risk of higher home prices in the future.
