October’s lower inflation rate is a welcome sign for a housing market that’s seen steady declines in 2022.
A recent report showing that the rate of inflation declined in October is good news for the real estate industry, and possibly a bellwether of declining mortgage rates in coming months, Lawrence Yun, chief economist for the National Association of REALTORS®, told thousands of attendees Friday at NAR NXT, The REALTOR® Experience(link is external) in Orlando, Fla.
On Thursday, the Bureau of Labor Statistics reported a 7.7% rate of inflation in October’s Consumer Price Index. That’s still causing pain at the grocery store and the gas pump, Yun said, but it’s down from 8.2% in September and may mean that mortgage rates have topped out. The jump in the rate for a 30-year fixed-rate mortgage, from about 3% at the start of the year to 7% today, has hit home sales hard. Sales were down 1.5% month over month and 23.8% year over year in September, according to NAR’s latest existing-home sales data.
What’s concerning is that the housing sector is a big contributor to gross domestic product, and the slowdown is pulling down the economy, Yun said. “If the housing market was stabilizing and not declining, GDP would be comfortably in the positive,” Yun said, “and we would not even be talking about a recession.”
Despite the headwinds of higher mortgage rates and slowing sales, severely limited inventory will keep home prices from declining dramatically in most of the country over the next year. “For most parts of the country, home prices are holding steady since available inventory is extremely low,” Yun said. “Some places are experiencing price gains, while some places, most notably in California, are seeing prices pull back.”
Even in areas where agents are seeing price declines, Yun said, 2022 is not a repeat of the 2008 housing crisis, when prices collapsed and foreclosures spiked. “Housing inventory is about a quarter of what it was in 2008,” he said. “Distressed property sales are almost nonexistent, about 2%, and nowhere near the 30% mark seen during the housing crash.”
Many factors are contributing to the undersupply of housing. Builders aren’t building enough homes. Investors have taken single-family homes out of the market for potential homeowners. And some owners are converting homes to short-term rentals rather than selling. But one added factor this year is sellers’ unwillingness to give up their low mortgage rate, Yun said. “They may be thinking about getting a bigger home for their growing family but then deciding: ‘We love our 3% mortgage more than extra room for the baby.’”In fact, if mortgage rates were following historic norms, they’d be lower than they are today, Yun said, showing a graph that demonstrated how mortgage rates run parallel to the government borrowing rate. Generally, the gap between the two rates remains constant. It grew in 2008 after the collapse of Lehman Brothers and again in 2020 when pandemic uncertainty gripped the country. And it’s grown again this year. “Today, we’re not in panic mode. Why the abnormal spread?” Yun asked. It’s a question NAR’s advocacy team is exploring with policymakers in Washington. “Without it, mortgage rates would be 5.8% rather than 7%, and we’d see the housing market begin to revive.”