High mortgage rates, combined with a slowdown in builds and rising rents, spell trouble for a typically steady Rochester housing market.
“We’re seeing a perfect storm here, nationally and in Rochester, in the way that all signs are leading to a slowdown for residential housing,” says Rick Herman, CEO at the Rochester Home Builders’ Association.
Following record lows during the height of the COVID-19 pandemic, mortgage rates nationwide have quickly and steadily increased.
During 2020 and 2021, uncertainty caused by the pandemic and its potential effects on the economy led 30-year weekly mortgage rates to fall to 2.65 percent in January 2021. Lower rates help homebuyers cut down on interest payments each month, meaning demand usually increases during these periods as well.
Since then, in response to Federal Reserve policies, mortgage rates have risen quickly, starting in January, reaching a high of 6 percent in September. That rate is the highest since 2008 when it was 6.63 percent.
The Fed had slashed interest rates during the coronavirus pandemic. Now, combating inflation has become a key priority.
In a recent policy speech, Jerome Powell, Federal Reserve chairman, noted that rising inflation requires using tools forcefully to bring better balance with supply and demand.
“While higher interest rates, slower growth and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses,” Powell said.
Higher mortgage rates are historically associated with periods of high inflation, like in this case, or stronger economic growth and lower unemployment, situations counter to a predicted 2023 “mild recession” from sources such as the Conference Board.
While sales of single-family residences in Rochester are not in freefall compared with seven-year low national numbers, sales in August were down 4.56 percent compared with a year ago and are still lower than pre-COVID norms. New listings are declining as well. In August, there were 831 in Rochester, an 18 percent decrease from the previous year.
So far, rising mortgage rates have not slowed rising home prices in the Rochester area. In January 2019, the median sale price for a single-family residence was $141,000. In January 2022, it had increased by $50,000 and is currently over $200,000, as of August.
A saving grace for Rochester is that the area’s prices continue to be lower (roughly half) than national averages, which currently sit at $426,000.
Nationally, new housing projects have slowed as well, with starts to residential housing construction falling to 1.45 million in July, according to Census Bureau data. In addition, September marked the ninth straight month that builder confidence fell according to the National Association of Home Builders. That slowdown is reflected in the Rochester area as well, according to Herman.
“The total volume of single-family starts will post a decline in 2022, the first such decrease since 2011,” Robert Dietz, the NAHB chief economist, said in a statement last month.
Reasons for a drop in Rochester’s new homes include rising labor costs and supply chain issues, particularly with Canadian lumber, which homebuilders in the area are especially reliant on. While board foot prices for lumber have fallen from record highs a year ago, they are still above pre-pandemic levels.
Simultaneously, rents continue to increase. According to data from Zillow, the rental index in Rochester rose from $1,100 in January 2019 to $1,500 in August 2022. While pre-pandemic rent increases were about 3 percent to 4 percent year to year, they soared above 10 percent during the peak of the pandemic and have yet to slow down.
This increase is a challenge for homebuyers who want to move on from renting but cannot afford the rising home prices. A survey by Redfin found that debt was the most common financial obstacle to home buying and that nearly a third of respondents were unable to save for a down payment.
“A lot of American renters want to buy a home, but they’re stuck renting because it’s simply too expensive to break into the housing market,” Redfin chief economist Daryl Fairweather says. “That’s especially true since they’re often competing against investors or other deep-pocketed individual buyers.
Relief could be coming for homebuyers, Fairweather notes, but it will be further off in the future.
“Mortgage rates are rising fast, which is a double-edged sword: Higher rates mean higher monthly mortgage payments,” he says. “But they will also eventually ease competition for homes, making it so fewer houses sell above their asking price.”
Herman believes there are a number of elements that will determine the long-term health of the housing market including the effects of the Inflation Reduction Act on homebuyers as well as changes that could come from the midterm elections.
“It’s a difficult evolving period, so it’s a bit of a shot in the dark now because of the factors we have to wait and see with,” Herman notes, adding this is a naturally slow period for Rochester anyway. “In general, there will probably be a drag on the housing market until we see how all these factors develop.”