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Mortgage Rates, Inflation Cause Housing Market Slump

Annie Erling Gofus - Jun 22 2022
Published in: Mobility
Redfin and Compass layoff hundreds of workers as real estate stocks take a hit

After more than a year of rapid growth, eye-popping home valuations, and growing real estate transactions, the housing market appears to be leveling off. Since the start of this year, mortgage rates and inflation have been on a steady climb, roiling the housing market and stock market. Two prominent real estate firms let hundreds of employees go due to anticipated slowing home sales and rising interest rates.

Stocks of real estate firms such as Redfin and Compass have recently tumbled. Both stocks fell by 3.86% and 6.19%, respectively, as both companies announced layoffs amid concerns of a US housing market bust and rising inflation.

Recently, Redfin's stock fell roughly 25%, and it issued a massive decline in anticipated home buying. In separate statements, Redfin and Compass announced 900 layoffs totaling more than 1,000 people.

In a blog post, Redfin CEO Glenn Kelman said that after the demand in May came in 17% below expectations, his company is laying off about 470 employees, which is about 6% of its workforce.

"We raised hundreds of millions of dollars so we wouldn’t have to shed people after just a few months of uncertainty," Kelman said. "But mortgage rates increased faster than at any point in history. We could be facing years, not months, of fewer home sales, and Redfin still plans to thrive. If falling from $97 per share to $8 doesn’t put a company through heck, I don’t know what does."

The layoffs come as the once-hot housing market begins to cool due to rising mortgage rates and inflation rates of around 6%. Mortgage rates have increased by more than twice this year. The fact that home financing has gotten more expensive has altered the calculations for many would-be homeowners. As a result, year-over-year home sales have been declining in recent months.

Redfin CEO Glenn Kelman stated that Redfin is providing laid-off workers with ten weeks of base pay, plus one week for each year of service after one year. The firm said it is also giving former employees three months of healthcare coverage, which should last them through the end of summer.

According to experts, the number of houses sold in the United States has dropped for at least three months in a row. Mortgage rates have increased significantly throughout the first half of 2018, climbing from just over 3% in January to 6.38% in June, according to Mortgage News Daily statistics. In addition to the high expenses that are pushing potential buyers out of the market, part of the reason there are more listings is that more homeowners have decided to sell.

During the epidemic housing boom, as demand for houses outstripped supply, the number of available houses for sale steadily declined. In May, the inventory began to shift in a new direction, according to Realtor.com's statistics, and the most recent week saw an increase of 13% in active listings over last year.

According to Redfin, a decline in home-buying budgets suggests that housing prices will continue to rise. Luxury home sales have fallen 18% year over year, according to the firm.

The housing market has recently seen a number of challenges, and mortgage requests have plummeted. Higher interest rates and the rise of remote work have boosted demand, even as the Federal Reserve's recent hawkishness will lead to higher borrowing costs and slow the boom. Fears of a recession and general economic uncertainty have caused economists to modify their predictions for the year in light of these trends.

Several changes are anticipated in the housing market in the next year, but not all are negative. Some relief may be on the way for frustrated homebuyers who have been waiting for months or even years for a suitable property to come on the market and have been unable to get their hands on one due to the high competition. While average mortgage rates and home values are not expected to drop, they are anticipated to level off somewhat. That may also provide some comfort to buyers who have been fighting to stay ahead of price hikes and climbing rates.

The housing market will be more stable in 2022, according to Realtor.com's new 2022 housing forecast, which suggests that the waters may be calmer as demand decreases and supply increases. According to the updated prediction, mortgage rates will average 5% in 2022 and climb to 5.5% by the end of the year. This compares with an original forecast of an average of 3.3% and an increase up to 3.6%.

Although buyer demand is anticipated to weaken during the summer, most markets will still favor sellers. Listings are expected to grow 15% for this year compared with 2021. The inventory of houses for sale was expected to increase by just 0.3% yearly in the original forecast.

According to the forecast, median home prices will rise 6.6% in 2022. This is well below the double-digit increases seen this year, but it is still significantly higher than the original forecast of a 2.9% increase.

Some buyers will be pushed out of the market by increasing mortgage rates and continued house price rises. The next six months may provide breathing room for those who can stretch their monthly housing budget, boost their down payment, or locate a cheaper house.