Homebuyers again confront ‘an abnormal’ housing market with many obstacles

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Less than a month before the traditional home-selling season begins, buyers again face a brutal housing market.

Too little inventory for sale, lofty price, and now rising mortgage rates have created a trifecta of obstacles for homebuyers.

“We’re in an abnormal housing market,” David Berson, chief economist and senior vice president at Nationwide Mutual, told Yahoo Money. “The issue is the low supply of available existing and new homes feeding high demand that continues to drive home prices up. The real question is whether mortgage rates will choke out the market due to excess demand.”

Buyers need to be ready to pounce as soon as they find “the one” or one that’s good enough or risk getting shut out of the market altogether as affordability wanes.

Here’s what they’re up against and what a buyer can do.

Inventory for homes is at historic lows

A home is offered for sale on January 20, 2022 in Chicago, Illinois. Nationwide, existing-home sales declined 4.6% in December from the prior month. This drop in sales is mostly attributed to a shortage of homes on the market. (Photo by Scott Olson/Getty Images)

A home is offered for sale on January 20, 2022 in Chicago, Illinois. Nationwide, existing-home sales declined 4.6% in December from the prior month. This drop in sales is mostly attributed to a shortage of homes on the market. (Photo by Scott Olson/Getty Images)

This year, more than 45 million millennials will be in their prime first-time home buying ages of 26 to 35. What they face is a scarce number of homes to buy, a persistent trend made worse by the pandemic.

Total housing inventory dropped 18% in December from the month before to 910,000 units, the lowest level since 1999 when the National Association of Realtors started tracking the data. That’s a deficit of between 500,000 to 750,000 active listings compared to December 2017-2019 inventory levels, according to Black Knight, a mortgage analytic firm.

Last year, a lack of workers and building materials and supply chain issues kept builders from developing enough new homes for sale. Many buyers — with not much to buy — scooped up new homes that were still under construction, driving up prices, Berson said.

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On the existing home-sale market, the rise in remote work and hybrid work from home arrangements does not bode well for homebuyers. Those who can work anywhere also can move anywhere, creating new demand in more markets. Others simply don’t need to move for new jobs and are staying put.

Refinancing to lower mortgage rates and lingering COVID concerns also are deterring current homeowners from selling their homes.

“Owners of existing homes haven’t put their homes on market as in the past,” Berson said.

Homes prices continue to rise

Even though a widely watched index showed home values slowing in November — albeit at elevated levels — prices again accelerated in late 2021 into early 2022, according to Black Knight. Home values jumped by 0.84% last month – the largest single-month growth of any December on record.

“Demand is high, but supply chain issues with building new homes creates pricing demands and inflation in home values, [it’s making it] more expensive to buy homes,” Jeff Ruben, president of WSFS Mortgage, told Yahoo Money.

Black Knight's Home Price Index

Black Knight’s Home Price Index

How much more expensive? About $350 more per month, or 32% higher than a year ago, according to Black Knight. It now takes 25.8% of the median household income to make the average payment on a 30-year mortgage, up from the 22.4% at the end of the third quarter.

Price growth may not be as steep this year, though.

“As mortgage rates rise, we do expect some moderation in housing demand, causing house price growth to temper,” said Sam Khater, Freddie Mac’s chief economist, in a statement.

That, of course, brings other problems for buyers.

Mortgage rates are expected to reach 4% by year’s end

The rate on the 30-year fixed mortgage — the most common home loan for buyers — has been steady around 3.55% for the past three weeks, according to Freddie Mac, after increasing more than a half-point in January.

(Credit: Freddie Mac)

(Credit: Freddie Mac)

A surprisingly good jobs report for January released last week could mean rates will climb even higher in the near term, but uncertainty over Russia and Ukraine could temper an increase. Overall, the Mortgage Bankers Association (MBA) expects mortgage rates to continue to rise throughout the year and reach 4% by December 2022.

“There’s a race right now to lock in those rates and know exactly what your payment is going to be for the next 30 years,” Jessica Lautz, vice president of demographics and behavioral insights at the National Association of Realtors (NAR), recently told Yahoo Finance. “When we look towards 2022 and rates rising even more, it’s going to cut out folks who are really stretching, who are saving and trying to enter home ownership.”

How to play in today’s market

Despite the headwinds, it’s “still an attractive time to be a borrower or buyer,” Ruben said, “because if you continue to delay your home purchase, it will be more expensive for the same home.”

Tackle the basics, Ruben said, to set yourself up for success in today’s competitive market:

  • Make sure payments are current and timely on other debts.

  • Have a good credit score and don’t borrow against credit cards. Credit (FICO) scores range from 300 (poor) to 850 (excellent). Although some lenders will give a loan with a 620 credit score, conventional lenders prefer a credit score of 700 or higher.

  • Save as much money toward the down payment as you can. A higher down payment makes it easier to qualify for a home loan and puts you in a better position with the seller if there are multiple bidders.

  • Get pre-approved, so the seller has confidence you can close.

Experian's FICO credit score range

Experian’s FICO credit score range

If you’re selling your home, keep in mind that the number of days a home is on the market is historically low with sellers able to sell quickly and at a relatively good price. If you are selling your home in hopes of purchasing another one, chances are your house may sell before you find a new home. That may require you to find temporary housing.

Ronda is a personal finance senior reporter for Yahoo Money and attorney with experience in law, insurance, education, and government. Follow her on Twitter @writesronda

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