Sam Gendusa November 3, 2022

Newsletter - November 2022

There’s a chill in the air, and not because it’s autumn. The housing market is cooling off fast, and some experts say winter is coming.

Mortgage rates topped 7% last month while originations plummeted, and things aren’t expected to turn around this year—or next.

The Mortgage Bankers Association is predicting originations to drop from $2.26 trillion in 2022 to $2.05 trillion next year. (That’s less than half the volume that was written in 2021.)

Existing home sales dropped for the eighth consecutive month in September, down 1.5% from August and 23.8% from last year.

“I have literally nothing under contract,” Philadelphia real estate agent Kira Mason told Fortune. “I’d be lying if I said I wasn’t nervous.”

And Las Vegas real estate agent Kristen Riffle said, “We are absolutely feeling the heat here. The buyer pool has, for the most part, dried up.”

Wells Fargo projects existing home sales to drop by 7.4% and new home sales to drop by 10.5% this year, and 13.1% and 6.5%, respectively, in 2023.

If their prediction about home prices—that they will slip by 5.5% next year—the housing market will have reached a drop that, historically, only happens during a recession.

“We’re forecasting a recession,” said MBA Chief Economist Michael Fratantoni.

“The most frequent way we enter into recession is the Fed raises rates to fight inflation,” said economist Bill McBride. “The leading indicator for this type of recession is housing.”

Spiking mortgage rates (which topped 18%) drove the U.S. economy into recession in 1981. A series of Fed rate hikes also preceded the 2008 housing crash and recession.

But it’s not all doom and gloom.

For now, home prices are still higher than they were a year ago because of a lack of inventory.

“A crash happens with oversupply,” said Lawrence Yun, Chief Economist and Senior Vice President of Research at the National Association of Realtors—and that’s not going to be the case anytime soon.

Yun expects the housing shortage will continue for now, but balance out within five years. He also predicts mortgage interest rates to fall to 5.5%-6% within the next two years.

The MBA predicts rates will dip back down to 4.5% by 2025 and home prices to moderate and “flatten out” by 2024, before rising again at a more sustainable rate.

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