Mortgage rates are on the rise. Will this slow the out-of-control housing market?

Mortgage rates are on the rise. Will this slow the out-of-control housing market?

Over a decade, low mortgage rates have helped homebuyers steadily raise the cost of housing. That includes the past few years, during the pandemic when rates fell to unheard-of levels, and home prices exploded across Southern California and the nation.

The rapid rise in prices and the sharp increase in prices have suddenly increased the cost of homeownership. So, if people can afford less, are home prices about to fall?

Several top real estate experts said they do not expect price drops - at least meaningful ones - in the absence of a recession. Prices will likely continue to rise, but in smaller increments than Southern California's current annual rate of 17%.

Economists and other experts have pointed to several factors that should support home values ​​to a large extent: a severe shortage of homes for sale, rising incomes, low unemployment, and — in plain words — the tendency of homeowners to be greedy.

Said Bill McBride, author of the financial blog Calculated Risk, best known for naming the second housing crash decades ago.

In the past, sharp increases in mortgage rates have slowed home price growth, and experts said higher rates should have the same effect this time around, too.

The simple reason is that people can't afford less, which is starting to show up. Industry professionals reported fewer people in open homes, fewer multiple offers per home, and fewer mortgage applications.

"It got freezing out," said John Underwood, who runs a team of Redfin clients in the San Fernando, San Gabriel, and Conejo valleys.

While it's still a strong seller's market, Underwood said homes that might have only had 15 or 20 offers a few months ago are now getting five or six. It is increasingly difficult for sellers to make special requests, including potential buyers' waiver of loans and contingent guesses that allow buyers to return if a problem arises.

Agent Randy Conrad, who works across Los Angeles County, said he saw some deals come out of escrow because buyers didn't lock in their prices and could no longer afford the home when borrowing costs jumped.

According to the latest available data, cooling demand has not yet translated into a slowdown in home sales.

The median home price across the six-county Southern California area rose 16.7% in March from the previous year to $735,000, according to data released Wednesday by research firm DQNews.

That's slightly faster than the 15.4% annual gain recorded in February. In Orange County, the average price for March rose 22% and topped $1 million, the first time the average price in any Southern California county has crossed the million-dollar mark.

March data reflects closed sales. Many of these buyers opened an escrow account in February when prices rose but were still more than a percentage point below today's prices. A more up-to-date view of market direction can come from looking at price cuts.

Michael Simonsen, the founder of Altos Research, said the number of sellers lowering asking prices is still much lower than usual. But price cuts are more common at a time of the year when they usually go down or do not go up much at all.

In Los Angeles, prices were reduced by 17.5% of listings as of April 8, up from 14% on March 11, according to Alto's numbers.

"Last year, when the market was very hot, [the price cuts] were going down significantly week by week," Simonsen said.