Will the Fed Thaw the Ice-Cold Housing Market This Spring?

While it is not a buyers’ market just yet, because of affordability challenges, buyers currently have more leverage than sellers.

By Dejan Eskic Chief Economist Salt Lake Board of Realtors®

The New Year started with healthy declines in the 30year mortgage rate. According to weekly data from the Mortgage Banker Associations, rates declined approximately 100 basis points from early November to the first week of February. This decline was welcomed, especially in January, as homebuilders saw better-thanexpected sales. This also helped buyers lock in lower rates for the expected February closings.

However, a robust job report and higher-than-expected inflation readings pushed treasuries near 4% in the second part of February, resulting in interest rates inching near 7% again. This shocked the mortgage purchase applications across the United States, resulting in a decline of 6% from the week prior and 44% from a year ago. This drop has pushed application data to levels not seen since 1995.

The solid economic data all but confirms that the Federal Reserve will continue with rate hikes. Expect mortgage rates to stay elevated until new job reports show negative readings and unemployment claims continue to rise.

The silver lining is that we saw just how responsive buyers are to lower interest rates. While the median single-family home price in Salt Lake County declined 9% from January 2022, some areas saw prices increase. In Salt Lake County’s Canyon Rim area (84109), the single-family median home price increased to $1.1 million in January, up 36% from $810,000 in January 2022. In Holladay (84117), home prices increased to $860,000, up 4% from $824,000 a year earlier. In West Valley City (84119), prices increased to $435,000, up 0.3% from $433,900

This begs the question, how will the spring home-buying season pan out? The answer to that, of course, depends on the direction of interest rates. A rate decline is likely to result only if the economy experiences weaker economic data that inches us closer to a recession.

However, expect seasonality to return this spring, albeit tepid to years past. February new listings on UtahRealEstate.com were 23% below 2019 levels and 15% below last year. However, active listings are well above the 2022 figures but still about 17% below 2019.

While I am not ready to call it a buyers’ market just yet, because of affordability challenges, they currently have more leverage than sellers. I say this primarily because the median days on market in February averaged about 51 days (a figure not seen since 2015), which is significantly higher than the six days experienced in 2022. Additionally, we see a spike in concessions such as sharing closing costs and sellers buying down rates. While the market is still chaotic, there are strengths in consumer finances that will dampen some of the headwinds. For example, household reserves remain elevated and growing. Data through Q3 of 2022 shows US households combined hold over $5.1 trillion, which is multitudes greater than the $0.9 trillion before the beginning of the pandemic

While the recent price declines have erased equity, most existing homeowners are in a strong financial position and still have a healthy equity buffer to absorb significant market shocks. Not to mention that over 75% of residential mortgages in Utah are locked into a rate of 4% or lower. The fact that we have existing homeowners giving up their low rate and purchasing a new home at a much higher rate should give us all a pause to think about just how strong the finances of current buyers are.

So, will the Fed thaw the ice-cold housing market this spring? No, quite the opposite, I expected them to try and keep it cool for a while, but I do expect the spring to thaw it a bit.