With mortgage rates near 7%, the housing party is over. Now it's hangover time

These days Andrea and Mike Johansen are not living their best life. It's temporary but the couple is crammed into a small camping trailer at her parents farm in western Massachusetts, across from a barn with 100 very noisy chickens.

"It starts at like 4:30 in the morning," Andrea says. "You're trying to have zoom calls for work and when the sun starts going down, they start all over again... going bonkers."

The Johansens thought they'd be in a newly built house by now. But with supply chain delays it's not finished. And so what was supposed to be a quick stay in the camper between homes is dragging on.

For the Johansens it's looking like a $360,000 mortgage is going to cost them about $800 more on the monthly payment. And that's going to be tough.

"We're living in the trailer because we can't afford to live anywhere else," Andrea says. "Our belongings are in storage and that's almost $1000 a month."

Mortgage rates have gone through the roof. From 3% at the start of the year to up near 7% for the past two weeks for a 30-year fixed-rate loan. Rising rates have slowed the pace of home sales for 7 straight months as frustrated buyers throw up their hands and give up, unable to afford the bigger payments.

Mike is a CPA and Andrea works as an engineer. They can afford the higher mortgage payment, but it will mean they can't spend or save money for other important things.

"I'm 41 years old," Andrea says. "I need to save for retirement."

Those soaring mortgage rates mean some people are backing out of buying a house altogether. In Colorado, 32 year old Hillary Tollerud-Ho had also agreed to buy a new home. But with the higher rates, she and her husband can't qualify for a mortgage anymore.

"We were told we have to pay off my husband's credit card and have to have a $100,000 down," she says. "There's no way we had that."

The couple lost a $1,000 dollar deposit they had put down. And they could have lost more. "Luckily, the builders were more than understanding," she says. "They didn't need to, according to the contract we had signed, but they returned the $5,000 earnest money."

The higher mortgage rates are putting home ownership out of reach for millions of people. And as a result, it's no longer a frenzied housing market with bidding wars and multiple offers on every home. These days a realtor can have an open house and nobody shows up.

"What we're experiencing now is like a hangover from this party in the housing market that was going on for the last two years," says Daryl Fairweather the chief economist at Redfin. "That party was fueled by cheap debt from the Federal Reserve, and now inflation is ending the party."

The Fed kept rates very low after the pandemic hit out of fear that the business shutdowns would spark a severe recession. But those super low rates combined with strong demand fueled an astonishing increase in home prices-- between 30 and 40% percent in just 2 years depending on which housing index you look at.

Now to fight inflation, the Fed is aggressively raising rates. And mortgage rates have more than doubled this year. That's thrown cold water on the housing market.

Outside of a brief dip when the pandemic hit, sales are the slowest they've been since 2015. Home prices have fallen modestly, about 6% from their peak in June. But Fairweather doesn't see big price drops ahead.

"We're forecasting that home prices will be flat next year," says Fairweather. She says the housing market has been resilient given how much rates have risen. "A recession might change how sturdy it is, but for now, it's been incredibly sturdy."

The biggest factor propping up prices is a shortage of homes that goes back to the last housing crash. Many builders lost money. And for a decade the pace of homebuilding fell short of demand. So even other economists who think prices might fall 10-20% nationally from their recent peaks are still not predicting a dramatic crash in prices. The supply of homes is still just too tight.

"Mortgage rates going up and down doesn't do anything to solve the housing supply shortage," Fairweather says. "That's going to be there."

Back by the chicken barn, Andrea and Mike Johansen are hoping rates fall before their house finally gets built so they can lock in a lower rate.

By November, Andrea says with faint optimism, "maybe they'll come down a little bit between now and then, maybe?" Her husband says he doesn't think that's likely.

"I don't think it's gonna happen either," Andrea says. "But there's wishin' hopin' and prayin.'" [Copyright 2022 NPR]