I think it is a good time for a follow-up article on the real estate market.

In April of this year, I wrote a column titled, “The Party Is Over For Home Prices.” I made a couple of bold predictions: Interest rates would pass 5% on their way to 6% during the summer, and home prices would fall. In particular I predicted, “Purchasing power is falling faster than home prices, and it is going to be a lonely world for first-time buyers in 2022.”

A lonely world for first time buyers, indeed.

As a result, purchasing power for would-be buyers has fallen through the floor. The Research Institute for Housing in America reports the average new mortgage payment rose $102 just from August to September. According to the Mortgage Bankers Association, the national median mortgage payment increased from $1,373 in September 2021 to $2,003 in September 2022, a whopping 45% increase.

Rates on 30-year mortgages did pass 5% in the summer, and then sailed right past 6% to more than 7.07% this week as lenders have scrambled to make sure they have a margin of error to sell loans into the mortgage resale market.

After the first quarter, the Fed talked about raising rates by three 75-point increases in the remainder of 2022, to around 3.75 % as I recall. After a series of very bad inflation figures persisted, the Fed altered guidance to factor in additional increases, leaving the Fed funds rate around 4.5% sometime in 2023.

Why would the Fed talking about possible raises next year affect rates today? Well, most mortgage lenders originate loans and then sell them to other buyers, whether into commercial mortgage-backed securities created by investment banks, or to real estate investment trusts that buy mortgages. Either way, when these mortgages are “repackaged,” they are priced above the ten-year treasury yield.

Each hundredth of a percent is called a “point.” Ordinarily, government-backed mortgages might sell for 150 points, or 1.5% above the 10-year treasury bond yield. If the 10-year yield was 2.0%, then mortgages would sell for 3.5%, which means the bank would want to offer you a mortgage of, say, 3.75%, and the bank makes a buck in the process.

That difference between the rate the bank offers you and the 10-year treasury is what we can “the spread.” A 175-point spread is fairly common, but spreads move around based on how competitive lending is, and also based on how confident banks are about what they can sell mortgages for in 60 to 90 days.

Suffice to say, right now banks are not confident. The spread right now is more like 300 points over the 4% treasury yield. That does not mean banks are making a killing. It just means they are worried if they sign a loan commitment with you today at 5.75%, by the time they turn around to resell it in 90 days, they might not be able to sell it for that.

As I predicted, the runup in mortgage prices has meant a drop off in sales. Redfin reported on Oct. 27 that pending sales fell 35% year over year the week ending Oct. 23, and we are in for “further sales declines.” Home touring activity is down 27% for the year, and the real indicator, purchase mortgage applications, is down 42% from a year ago.

What about home prices? Home prices did fall this year. The Case-Schiller same home sales index indicates that national home prices fell about 1% in August and September. The runup from summer 2021 to summer 2022 was so high that prices are still ‘up’ year over year even as prices are falling from recent highs.

Maine has been in something of a bubble, particularly the coast where a very high percentage of buyers are from out of state, something I covered in my May column, “The Elephant in the Market.” But Redfin data shows that prices in Maine are slipping. The median home sales price statewide was $374,000 in June and has fallen to $344,000, a decline of 8% that does not control for home size or other factors.

Further proof of a falling market is the percentage of homes for sale with price reductions for homes on the market. Nationally, the number has doubled to 19%. But in some markets it is far higher, for example in Phoenix where it was 44% in September. The bottom line is that prices cannot hold where they are today, and sellers know it.

Inventories confirm this. This is the prediction I got wrong. I said inventories would rise to six months this year. Inventories have risen to two months of supply. I think they will continue to rise due to job relocations and retirement moves. I will peg inventories at 3% by the end of this year and 6% by next summer.

Michael Mullins holds an MBA from the University of Chicago and an MS in Real Estate Development from MIT. His business, Cranesport LLC is based in Camden and he lives in Rockland.