Oh, you want to buy a house? The bad news is that right now, you would pay a historically high price for a home, and as of today, you’d also hand over more money in interest for the privilege to do so — a whopping 5 percent, on average. In fact, save for two brief spikes in 2011 and 2018, home buyers haven’t been paying this much for a 30-year mortgage since the spring of 2010, when the economy was struggling to get out of recession and the unemployment rate had just fallen below 10 percent. “It’s probably fair to say we have never seen an environment like this for home shoppers, and we certainly haven’t in recent memory,” Nicole Bachaud, economist at Zillow, told me. “Home values are climbing at a record rate, and buyers no longer have the respite of record-low mortgage rates to keep monthly payments in check.” The good news? Well, anyone who’s going to buy a house right now will be contributing to the economy by giving away lots of their money to the seller and the mortgage company — so there’s that.
So what’s going on? For anyone who mistakenly believes that the economy is in bad shape, the real-estate market is a looking glass into the financial situation of the U.S. and whether things are bad or just feel bad. Housing is a giant part of the U.S. economy — more than 16 percent of GDP, according to a congressional research report last year — and is directly connected to the historically rapid rebound in employment and wages. At the same time, though, inflation is at the highest rate that it’s been in 40 years, corroding whatever savings people have left after a pay increase and whatever stimulus they got during the pandemic, and pushing the Federal Reserve to hike interest rates before prices get out of control.
On Tuesday, though, the Fed appeared to be ready to hit the brakes faster than anyone realized. Fed governor Lael Brainard said the Fed would soon “rapidly” reverse its pandemic-era debt-buying program, when it bought trillions in debt to keep the economy afloat, and start selling government and corporate bonds back into the market as soon as next month — essentially pushing risk back onto investors. Since debts are essentially liabilities, investors are going to demand more money in interest to hold onto the assets. Hence, the interest rate on 30-year mortgages, the most popular way to finance the purchase of a house, spiked to more than 5 percent — a stunningly fast increase, given that the average was just over 3 percent at the start of the year.
This is supposed to discourage people from buying homes. The thing about the real-estate market is that it has been crazy — as in, deranged and totally unhinged from reality — for years. Daryl Fairweather, the chief economist at real-estate site RedFin, noted to me that there are still plenty of buyers who don’t care what the mortgage rate is because they’re coming in from other areas or as investors, or they can pay for a property with cash. The chill in Manhattan prices since 2019, for instance, is all but erased, according to Douglas Elliman. Practically since the start of the pandemic, home prices have been rising, people have been paying with all-cash offers, and properties are spending less than two weeks on the market. You’d think that after an 18-month bull run, the market would have cooled, but the start of this year was the most competitive ever, according to RedFin. The number of houses available is actually falling, making it especially hard for anyone who wants to buy to find a place, and since only about 9 percent of homeowners are looking to sell in the next year — about the same number as last year, according to NerdWallet — that problem probably isn’t going to get better anytime soon. Still, something has to change if the market is going to meet the vast majority of buyers. Fairweather noted that mortgage applications are down, as are online searches and home tours, compared to last year. “We’re starting to see some of the very early signs that the market might be cooling,” Fairweather said.