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Mortgage rates are up, sales of homes are down

AILSA CHANG, HOST:

The U.S. housing market today looks very different from the frenzied market of about a year ago. Sales of existing homes dropped for the seventh month in a row as of September. Builders are breaking ground on fewer new homes now than they did a year ago. And would-be buyers like Cheyenne Gordon are feeling a different kind of pain. You see, she and her partner recently looked at a house in Seattle that was around 650 square feet - about the size of an average studio apartment.

CHEYENNE GORDON: It was listed for $575,000. It sold for $125,000 over asking price. And that's what it was like in April. Now, we can't look at houses that are $575,000.

CHANG: That is because the interest rate for a 30-year fixed-rate mortgage in the U.S. has soared to nearly 7%. That's the highest since 2008. And as painful as this is for would-be buyers, sellers and builders, all of this is kind of by design. You see, the Federal Reserve is trying to bring inflation under control by raising the cost of borrowing. Fed Chairman Jerome Powell explained the policy and the rationale after the Fed issued its fifth rate hike in six months.

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JEROME POWELL: We've had a time of a red-hot housing market all over the country where, you know, famously, houses were selling at 10% above the ask before even seeing the house - that kind of thing. Housing prices were going up at an unsustainably fast level. So we probably in the housing market have to go through a correction.

CHANG: You see, last year, homebuyers were competing in a red-hot seller's market, having to move quickly and aggressively in bidding wars. That isn't the case so much anymore, with high interest rates on mortgage loans and rising home prices slowing down home purchases.

CHRIS ARNOLD, BYLINE: Up until recently, I mean, prices were going up 30 to 40% in just two years, you know, because of those bidding wars. Talk about inflation, right? I mean, you know, OK, bananas cost more at the grocery store. But 30 to 40% in two years for a house - I mean, it's crazy.

CHANG: That is NPR correspondent Chris Arnold. I spoke with him earlier about what it means now that mortgage rates have risen in response to the Fed's effort to stamp out inflation.

ARNOLD: Mortgages anticipate where the Fed is headed with its rate hikes and where inflation looks to be headed. So they moved a lot very fast earlier this year, and now they're all the way up near 7%. They started at 3%. On a $400,000 mortgage, that means $900 more per month on the mortgage payment - I mean...

CHANG: Wow.

ARNOLD: ...Every month, nearly a thousand dollars.

CHANG: Yeah.

ARNOLD: And that's for a $400,000 mortgage. A lot of homes cost more than that, obviously. So the Fed is saying this is necessary medicine for the economy to cool inflation. But it's painful medicine, too. And Jerome Powell, the Fed chairman, talked about this. Here's him speaking.

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POWELL: We have got to get inflation behind us. I wish there were a painless way to do that. There isn't. We have to get supply and demand back into alignment. And the way we do that is by slowing the economy.

ARNOLD: The pain here is people can't afford to buy homes, and they really wanted to. And some of them are stuck. And that means fewer homes are selling month after month now. Sales are declining. It's the slowest sales pace in basically seven years.

CHANG: Yeah, so different from a year ago. So, Chris, who are the people right now who are most caught in a bind, would you say?

ARNOLD: I would say people who decided to buy new construction homes. So they weren't built yet, and they signed a thing that said, yes, I signed this contract. I agree to buy this house in six months or a year - whenever it's built. Well, there were pandemic delays. And then meanwhile, rates went from three to up near seven, and now some of them can't even qualify. We talked to a homebuyer in Colorado. She's 32 years old. Her name's Hillary Tollerud-Ho, and she's a stay-at-home mom. And this happened to her family. Rates are just too high now, and they can't qualify.

HILLARY TOLLERUD-HO: We were told we'd have to pay off my husband's credit card and have to have $100,000 down to even manage to purchase our townhome, which we were going to buy for 375,000. And 100,000 is way more than 20%. There's no way we had that.

ARNOLD: So they had to back out of buying the house, and then they lost $1,000 deposit that they put down. Some homebuyers or would-be homebuyers have to put down 50,000, sometimes a $100,000 deposit. And they could lose that if they walk away. So it's just a very hard situation.

CHANG: Well, we heard Powell earlier talking about housing prices going up at an unsustainable pace, and he was saying the housing market has to go through a correction. What does he mean by that - correction?

ARNOLD: That's a good question. He didn't say exactly what he meant by correction, and it could mean a couple different things. And mainstream economists are kind of split on this. Some think prices may still rise, say, 2% nationally year over year, just slow down a lot. Others say, no, prices could be down, like, 5 or 6% year over year. Some say a year from now, maybe more than that in some markets where prices really surge. But either way, almost nobody expects a major housing crash like we saw 15 years ago.

CHANG: Right. I guess that's mildly assuring. It doesn't sound like we're headed to a 2008-type implosion of the housing market. But...

ARNOLD: No.

CHANG: What would you say is different this time?

ARNOLD: Two big things are different. One is we have a housing shortage. There is not enough supply in terms of homes. That is very different. Last time we had too many homes. So after the last crash, though, we didn't build enough homes for, like, a decade. And meanwhile, the millennial generation - they've settled down. They want to buy houses, and homes are selling pretty quickly after they get listed. They're on the market for about 16 days. That's just a very fast pace. So those two things together - not enough supply and very strong demand - it's kind of econ 101. It's hard for prices to fall too much.

And then the other thing is that this time around, people can afford their mortgages. And by that I mean not people who are stretching right now this week with the very high interest rates. But over the past five years, you know, there's lots and lots and millions of people who bought homes where they bought at a low rate or refinanced, and now they've got a 2.5% mortgage or something. And it's fixed, not adjustable. So for the next 30 years, they're going to have the same mortgage payment. And four years into the future, many, many, many, many American homeowners will have an affordable house payment, which will stabilize things. So it's just very different than 2008.

CHANG: So what do buyers and sellers need to know right now? Like, what should they consider if they are in the market or thinking about entering the market?

ARNOLD: Well, you know, unless you're stuck in some kind of bind where you're going to lose 50 grand if you don't buy the house, for buyers, you don't want to buy into a frenzy. And in some ways, look. The pressure's off. It's not a great time to buy a house. Prices are still very high. Interest rates are very high. So just do your research on different neighborhoods, and find a good first-time home buyer program. For sellers, prices are still very strong out there, but just don't price the house like the height of the frenzy three or four months ago. Price at a price that's going to sell today.

CHANG: That is NPR's Chris Arnold. Thank you so much, Chris.

ARNOLD: Absolutely. Thanks, Ailsa. Transcript provided by NPR, Copyright NPR.

NPR correspondent Chris Arnold is based in Boston. His reports are heard regularly on NPR's award-winning newsmagazines Morning Edition, All Things Considered, and Weekend Edition. He joined NPR in 1996 and was based in San Francisco before moving to Boston in 2001.