Nicklaus: Higher mortgage rates are cooling the red-hot housing market

Roger Pettingell Sarasota Real Estate

As mortgage interest rates rise along with summer temperatures, the red-hot housing market is beginning to cool.

Prices continue to climb — in metro St. Louis they rose 14% year-over-year as of March, according to a federal index — but bidding wars aren’t as fierce as they were a few months ago.


Matthew Muren, an agent at Berkshire Hathaway Home Services in Town and Country, said it was as if a switch flipped on Memorial Day. His typical listing now gets two or three offers, down from five to 10 in May, and buyers are no longer waiving home inspections and other contingencies.

“Rates are probably what triggered it, but there’s a psychological impact as well from everything else going on in the economy,” Muren said. “Everyone is taking a breather and having to recalculate.”

The average 30-year mortgage rate has doubled, to 5.7% from a low of 2.8% last summer. Added to the higher prices, that means a typical buyer’s monthly payment is 50% higher than it was a year ago.

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“A lot of people who might have bought a house in the spring of 2021 might not qualify for a mortgage today if they are buying the same house,” said Jeff Tucker, a senior economist at Zillow. “It shrinks the options for what people can afford.”

Zillow’s numbers show subtle changes in the market: 9.5% of St. Louis area sellers reduced their prices in May, up from 7.8% in April. That’s still far below the 16.9% of listings with price cuts in May 2019.

While price increases are slowing, Tucker doesn’t expect them to go into reverse. Inventories remain low because builders didn’t construct many new homes for a decade following the housing crisis of 2008 and 2009.

Meanwhile, the millennial generation is in its peak home-buying years, and the coronavirus pandemic created new demand as houses became workspaces too.

That combination of strong demand and limited supply should keep prices rising for the rest of this year, Tucker believes. “Prices may flatline sometime next spring and early summer, but we’re not forecasting a broad drop in prices,” he said.

The American Enterprise Institute’s national house-price index jumped 17% for the 12 months that ended in May. Ed Pinto, director of the institute’s housing center, predicts that will slow to 10% by August and 6% by December.

Like Tucker, Pinto doesn’t expect prices to fall nationwide, but he thinks some regions could see declines. He said falling prices are most likely in areas with sluggish job growth, a category that includes St. Louis.

Within those areas, Pinto predicts that low-income neighborhoods with modestly priced homes will be hit hardest. “The only tailwind they had was the Fed,” he said, referring to the Federal Reserve’s two years of super-low interest rates, “and now that tailwind has disappeared.”

For home buyers, the tailwind’s disappearance means tough decisions about what they can afford. Muren is seeing buyers consider cheaper neighborhoods, look at smaller houses or put their search on hold.

“The buyer who was ready to spend $350,000 now drops into the $300,000 range,” he said. “Every single seller’s buyer pool has shrunk.”

Still, Muren knows the extreme seller’s market of 2021 and early 2022 was unusual, and he believes the market will be healthier if inventories rise. He expects the buyers who’ve been missing from recent open houses to return once they’ve adjusted to higher mortgage rates.

“It takes time for everyone to wrap their heads around a rapid change, but they will,” he said.

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