That is the gist of Dr. National Association of Realtors chief economist Lawrence Yun at a Chicago Association of Realtors Market Outlook event on Jan. 11, and Anthony Chan of Chan Economics and former JPMorgan Chase Bank chief economist at a similar event on Jan. 13 for the Mainstreet Organization of Realtors in the suburbs.
A year ago, interest rates were around 3%, where they had been for most of the past two years, leading to an unprecedented boom in the housing market. Then the Federal Reserve launched its attack on rising inflation using its main weapon: interest rates.
“Rising mortgage rates suddenly upended all the aspirations of buyers, sellers and their brokers for the coming year,” Yun said last week. As the year progressed and rates continued to rise, “that led to hammering in the housing market,” he said.
At the beginning of November, the fixed interest rate on a 30-year mortgage reached 6.95%, the highest in 20 years. The impact on the housing market was clear with sales down more than 30% both nationally and in the Chicago area.
Yun expects the year-end numbers, which would reflect both the still booming start to the year and declines in recent months, to show a nationwide sales decline of about 16% from 2021.
Interest rates have fallen over the past two months to 6.33% on Jan. 12, but still hurt affordability for buyers.
Chan said he believes further Fed hikes will be smaller than the Fed forecast in late December. The central bank’s forecast is that the effective rate, which is typically a point or more below mortgage rates, will reach 5.1%. but Chan said “it probably won’t be more than 4.4%” by the end of 2023, financial markets think.
The Fed, he suggested, is addressing higher rates because “they’re trying to put the brakes on inflation. If they say they’re not going to raise rates, consumer confidence goes up, we keep spending and then inflation doesn’t slow down. “
Chan quoted a Chinese idiom his father used to use saying, “Sometimes you have to kill the chicken to scare the monkey.” That is, by appearing more pessimistic than they really are, Fed officials can keep consumers from feeling the bubbling optimism that drove spending during recent boom years.
“The reality is that (the Fed) may not do that much, and that will be very beneficial,” Chan said.
Yun noted that the spread between 10-year Treasury rates and 30-year mortgage rates, typically less than 2.5 percentage points and often less than 2, widened sharply to more than 3 percentage points during the rise in mortgage rates. Something of an overreaction “that will correct,” Yun said, as mortgage shocks ease.
“We won’t see higher rates again,” Yun predicted. “This year I think rates will be steadily coming down.”
While interest rates skyrocketed and sales fell in the second half of the year, the third leg of the crutch, prices, held firm. Weekly reports from Midwest Real Estate Data show that the median price of homes sold in the Chicago metropolitan area has been relatively flat, moving about 1.5% higher or lower each week than the corresponding week in 2021.
That includes weeks from late November to early January, when many deals made on the steep slope in interest rates would have closed.
Prices, Yun said, are “still holding up.” This is largely because the stock of owner-occupied homes is extremely tight everywhere.
Two reasons why stocks are tight: Nearly everyone who was likely to ever sell quickly jumped into the market during the boom, ready or not, and homeowners “are very happy with their 3% mortgages,” Yun said, not inclined to exchange them for 6% or even 5% mortgages.
If interest and price conditions improve, Yun said, the Chicago area is well positioned to see the housing market bounce back. The main reason is job growth.
Illinois now has about 0.4% more payroll jobs than it did just before COVID, according to an analysis of Bureau of Labor Statistics data by Yun’s research team. That’s well below places like Idaho, Utah, Texas and Florida, which are more than 6% ahead of their pre-COVID job totals, he said, “but at least it’s in positive territory.”
Several Midwestern states, including Wisconsin, Michigan and Minnesota, are still behind on their pre-COVID numbers. Indiana is the Midwest’s peak, with jobs up 2.2% from pre-COVID numbers.
Illinois job growth, Yun said, “isn’t Springfield and Peoria, it’s all Chicagoland where those jobs are being created.”
Positive job growth bodes well for the housing market in the coming year, Yun said. “It means more people working in the state, which means more buyers once rates come down.”