Another famous name is weighing in on the housing market. A few weeks ago, it was Elon Musk claiming that home values would plummet as commercial real estate faced headwinds. Now, it’s Barbara Corcoran—albeit a more experienced source when it comes to real estate—touting the opposite.
The statements came in a recent interview Corcoran did with Fox Business’s Liz Claman. “There’s no relationship between the commercial and the residential,” Corcoran told her. “The residential is starting to rebound, but the commercial is in trouble.”
“So Elon’s wrong?” Claman asked.
“Of course he’s wrong,” Corcoran said. “Yet again.”
An Interest Rate Bottleneck
According to Corcoran, what’s keeping prices from rising much now is a “bottleneck” caused by higher mortgage rates, which now sit at 6.71%, according to Freddie Mac.
Average rates have climbed nearly 150 basis points in just the last year and over 400 since rates were at their lowest—a mere 2.65% in early 2021.
The rising rates have put what many in the industry call “golden handcuffs” on today’s homeowners, discouraging them from listing their homes and buying new ones. (That would require trading an ultra-low interest rate for today’s much higher one). According to Redfin, about 85% of mortgage homeowners currently have a rate of 5% or lower.
“Sellers don’t want to move from their apartment or their home because they don’t want to take on higher interest rates, and buyers are too afraid because they are getting less house. In fact, they’re getting half the house they would have two years ago,” Corcoran said. “So you’ve got a standoff going on.”
Higher Home Prices Could Be Down the Pike
Corcoran’s right: Buyers have definitely pulled back since rates jumped. Applications to purchase a home are now 27% below last year’s levels, according to the Mortgage Bankers Association, and home prices have stopped their steep upward climb as a result. The median sale price clocks in at $407,415, per Redfin’s latest numbers, up from $382,000 in January but down 4% from a year ago.
Things will change once rates turn a corner, though, Corcoran told Claman. “The minute those interest rates come down, all hell’s going to break loose. Prices are going to go through the roof,” she said.
Many industry players expect rates will indeed fall later this year. MBA predicts rates will drop to 5.6% by the end of 2023 and 4.8% by the close of 2024. Fannie Mae’s latest forecast calls for 6% and 5.4% rates, respectively.
Those are just forecasts, but if they ring true, it could spur a jump in demand, which the housing market’s ill-prepared to meet. Housing inventory is currently near all-time lows, and according to Realtor.com, the market’s already 6.5 million short of demand. Lower interest rates would only add fuel to the fire.
As Corcoran put it, “It’s going to be a signal for everybody to come back out and buy like crazy. We could have COVID all over again.”
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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.