Supply, Demand, and Rising Rates: A Cooling Off Period

Toilet paper and cleaning supplies are not the only commodities in infamously short supply in recent years. Low Federal mortgage rates and migrations prompted by increases in cost of living shifted the real estate market to heavily favor the seller from early 2020 onward. The pressure to find suitable and affordable housing culminated in a frenzy, with sellers frequently fielding numerous offers (often sight unseen) within hours of a listing going active. A viral video posted to WRAL.com from February of this year illustrated this imbalance of supply and demand within the market, with over 80 potential buyers lining the streets to attend a Tuesday evening open house in North Raleigh.

This was not an isolated instance, with homes nationwide being sold in bidding wars that drove prices in the tens of thousands above the initial listing price. Hopeful shoppers once eager to take advantage of affordable payments via access to low mortgage rates have been dealt a one-two punch of high demand and lack of supply. Prospective buyers have shifted focus and become procrastinating buyers. The combination of recent inflation and anxiety over the potential for an economic recession has culminated in a recently increased air of caution when considering taking on the responsibility of homeownership.

Rate increases are now working to supplant the reign of the seller, taking dominion over the market in hopes of establishing a sense of balance and stability. Efforts to prevent a repeat of the early 2000’s housing bubble burst have pushed the Fed to increase rates in order to increase supply and thus slow the market. Though still in the early stages, trends indicate that rates regularly hovering around 5% have slowed sales enough to catalyse an increase in the supply of houses available. Avoiding such a period of recession and housing crisis is viewed as tantamount to the success of economic recovery measures following the Covid-19 pandemic.

The influence of increased rates is also measurable in listing prices. Business Insider makes mention of this nationwide phenomenon in their article “Three Signs the Housing Market is Slowing Down”, stating that sellers are going through a period of softening their sales expectations and using reductions in asking price to attract bids. It goes on to state that the rate of listing price deductions through May 2022 have been at their highest rate since October 2019. This and the marked increase in housing construction to assuage the US housing crisis are working to provide employment opportunities whilst also increasing supply. Working towards equilibrium in the market is the current method being utilized to restore the confidence and stability of buyers, making the dream of home ownership an achievable goal once again.

Will Fed rate increases be successful in staving off an economic crisis in the long-term? Are listing price reductions and new construction the solution to attract the return of hesitant buyers, or are there other methods that would better restore confidence in home ownership?

Let us know in the comments below or discuss it with a colleague in an upcoming CE class!

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References:

Mims, Bryan, et al. “Viral Video: Huge Crowd Shows up to See Raleigh Home Listed at under $300,000.” WRAL.Com, 24 Feb. 2022.

Lloyd, Alcynna. “3 Signs the Housing Market Is Slowing Down.” Business Insider, 4 June 2022.