Mortgage rates are up, and demand for homes is edging down. Redfin Chief Economist Daryl Fairweather laid out a possible scenario of what the months ahead might look like at Connect Now.

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An economist by trade, Daryl Fairweather doesn’t claim to know for sure what the future holds for the housing market. 

But if things continue on their current path, it could look something like this, she said. 

A housing market thrust into hyperdrive by historically low interest rates finally begins to slow this year after the Federal Reserve raises rates to fight inflation. 

The number of homes sold in 2022 declines by something like 10 percent as housing demand weakens. Prices don’t fall nationwide, but price hikes do slow, dropping from 20 percent to perhaps 5 percent annual growth by the end of this year. 

Homebuilders, spooked by the slowdown in home demand, scale back their construction plans

And finally, all of this comes to a head a couple years down the line, when a renewed demand for homes once again meets a market with too little inventory to sell.

Fairweather, Redfin’s chief economist, laid out this possible scenario at Thursday’s Inman Connect virtual event. It’s just one of the outcomes that could come to pass if the Fed overshoots in its efforts to curb inflation and ends up having to bring rates back down once again, she said.

“I don’t think we’re going to use this pause in demand to build a lot more housing to be ready for that increase in demand a couple years from now,” Fairweather said. “So I feel like unfortunately a couple years from now we’re going to be having the same conversations about how much home prices are going up, how much demand there is, and how unaffordable housing is.”

A decline in demand is almost inevitable as mortgage rates rise from less than 3 percent to nearly 5.5 percent, Fairweather told Era Ventures Managing Partner Clelia Peters during the session. 

In fact, the scaleback in demand is already underway, compared to the red-hot spring home market of 2021.

With mortgage rates and home prices continuing to rise in tandem, it’s not hard to see why some buyers are getting cold feet, Peters said.

“My father, who is a real estate agent, has always said that really most people are in the monthly payments game,” Peters said. “So most buyers actually are thinking about what their aggregated monthly payment is.”

This hike in monthly payments for newly purchased homes is already having an effect on homebuyer participation, Fairweather replied.

“When interest rates go up, it’s money that isn’t going into the seller’s pocket, but it’s money the buyers have to pay,” Fairweather said. “So that’s just an added cost that makes buying a home less attractive, and that’s what slows down demand.”

As homebuyers take their foot off the gas, it’s likely to give the market some time to replenish inventory and make things a bit less favorable for sellers, Fairweather said. 

Buyers and their agents will “feel a pretty big shift.” But will buyers feel like they have the pick of the litter? Not likely, Fairweather said. 

It’s also hard to tell how many homes will come onto the market in the coming months. It’s possible that new listings will start to increase, Fairweather said. But predicting sellers’ thinking can be a tricky task, she added.

“I think a lot of sellers would prefer to just wait it out, especially if they bought in the last year,” Fairweather said. “It’s not like they’re going to need to turn around or want to turn around and sell during a down market.”

While these scenarios reflect Fairweather’s informed opinion of what could happen, it’s difficult to know for sure how buyers and sellers will react to all these big economic changes, she said.

“Mortgage rates shot up faster than they ever have,” Fairweather said. “These are unprecedented times.”

Email Daniel Houston

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