“The housing market is in the early stages of a major transformation”: Home sales may fall 25% by the end of the summer, according to this analyst. Here’s why.

“The housing market is in the early stages of a significant decline in activity, which will lead to a sharp decline in the rate of home price increase, possibly beginning in the spring,” Shepherdson wrote in a research note distributed Sunday.

As evidence of this expected slowdown in home sales, Shepherdson cited mortgage demand. The latest data on mortgage applications from the Mortgage Bankers Association shows that the number of applications for loans used to purchase homes is down more than 8% compared to last year. Relatively speaking, the demand for refinancing has fallen by almost 50% compared to last year.

Lower mortgage demand can predict a decline in home sales, because most buyers rely on financing to ensure large volume purchases. Affordability issues are likely to be responsible for the downturn. As of Thursday, the average 30-year fixed-rate mortgage rate exceeded 4% for the first time since May 2019, According to Freddy Mac
FMCC,
+3.49%.

According to Shepherdson’s calculations, the rise in mortgage rates since September has increased the cost of monthly mortgage payments for a median-priced home by more than $400, or 27%.

“This is a massive increase, even for families living on savings accumulated during the pandemic — a one-time increase in savings cannot fund an increase in mortgage payments over the next 30 years — and will drive demand further downward,” he wrote.

In fact, affordability is today’s top priority for home buyers. A recent survey by US News & World Report It found that nearly half of buyers say affordability is their biggest concern, although the majority of those surveyed indicated that they remain optimistic that they will be able to purchase a home in the next year.

Shepherdson said the ripple effects of the shift in existing home sales will be far-reaching, arguing that the pace of rent increases will eventually slow and perhaps even reverse. It will also spread to new home sales, which are expected to decline similarly. The decline in new home sales may represent a downward burden on GDP, as it will lower demand for services associated with home building and reduce spending on items such as building materials and appliances.

The bad news for any American who insists on trying to buy a home under these conditions is that it is not clear how this situation will ultimately affect the availability of homes for sale. Part of the reason for the high home prices is that there is a huge shortage of inventory in the housing market, which has fueled competition for the few homes for sale.

It appears that lower demand will lead to an increase in the stock of homes for sale. But Shepherdson cautioned that many sellers may pull listings or refuse to put their homes on the market because “nobody […] He wants to be the last person to try to sell in a bear market.”