The combination of high prices and rising mortgage rates has thrown a bucket of cold water on a once white-hot housing market.
US home prices had jumped 37% in two years leading up to March, according to the S&P Case Shiller US National Home Price Index. Meanwhile the National Association of Realtors says that housing affordability is as low as it's been in years due to that combination of greater prices and higher mortgage rates.
The Mortgage Bankers Association said earlier this month that its index of home buying and mortgage refinancing activity dropped to a two-decade low.
"Weakness in both purchase and refinance applications pushed the market index down to its lowest level in 22 years," Joel Kan, the group's associate vice president of economic and industry forecasting, said in a press release.
The last couple of years have been marked by surging prices and bidding wars as the work from home model has become more ubiquitous. The higher income, more mobile workforces on the coasts have had the option to relocate to tertiary markets, and many have. But higher prices alone put homes out of reach for many.
Now, mortgage rates are rising as well, which means that anyone borrowing money to buy a house is facing much bigger interest payments than they would have in the last decade — or even at the start of this year. And as rates rise, it becomes harder for people to qualify for a mortgage in the first place.
Builders and sellers have had enormous advantages in recent years as would-be buyers competed with one another, and now, that advantage is shifting toward the smaller buyers who are still in the market.
Rick Palacios, the director of research for John Burns Real Estate Consulting, told Insider that that dynamic is turning the spring into a dark time for builders.
"Every single metric that we look at has just continued to worsen," he said. "No one was forecasting 5% mortgage rates as we came into this year. Absolutely nobody was thinking they'd get to 6%, and lo and behold, today we're essentially at 6% mortgage rates. That's a huge shock to the consumer."
Palacios, whose firm consults for the homebuilding industry, says home buyers are very sensitive to not only mortgage rates, but to their sense of the overall economy. Among those who could still buy, things seem deeply uncertain all of a sudden. They're reluctant to make a life-changing purchase with inflation at a 41-year high and stocks now in an official bear market .
"Pricing really has gotten out ahead of incomes," said Robert Dietz, the chief economist for the National Association of Home Builders. "We're looking at probably the most significant pullback in housing demand since the Great Recession itself."
Dietz, who is also the NAHB's head of economics and housing policy, said the jump in mortgage rates cooled the market abruptly in the spring.
"A market that has lacked resale inventory, a market where construction costs have continued to rise, and now on the demand side where interest expense is going up because mortgage interest rates are increasing, all of those factors combined mean that we're seeing a softening of housing demand," he said.
That said, he's not predicting anything close to a crash or a bubble bursting, a view shared by other experts. Dietz says new home construction will slow and prices will slip in some markets, singling out especially formerly-hot areas like in the Mountain States. But investors are likely to support the market, a factor that will limit any price declines.
Palacios is skeptical on that point, saying he thinks those investors might pull back, and US home prices could go into a protracted slump.
"We're not forecasting a collapse in national home prices, but I will say we are forecasting that home prices will decline nationally over the next couple of years," he said. "There are pockets of the country where you can make a strong argument that home prices will give back 10%-plus, some probably stretching to almost 20%."
When rates spike and the housing market turns, he says, it usually turns in a hurry. That means builders are much less likely to raise prices on new homes, and they're starting to cut prices and offer incentives on homes that have been on the market for a while.
"It hasn't been a buyer's market for a long, long time," he said.