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On Tuesday, layoffs hit two of the biggest names in real estate. First, Redfin announced it’s laying off 8% of its staff. Then Compass, one of the nation’s largest residential brokerages, announced it’s cutting 10% of its workforce.
“Today’s layoff is the result of shortfalls in Redfin’s revenues, not in the people being let go…with May demand 17% below expectations, we don’t have enough work for our agents and support staff,” wrote Redfin in a statement announcing the 470 job cuts. Compass also cited the housing slowdown as the culprit for its 450 layoffs.
In April, the U.S. housing market entered into slowdown mode. But as data rolls in for May and June, we’re learning that this isn’t a mild slowdown—it’s an abrupt shift. Moody’s Analytics chief economist Mark Zandi tells Fortune we’ve gone from a housing boom into a full-blown “housing correction” and will soon see the year-over-year rate of home price growth fall from a record 20.6% to 0%. If a recession does materialize, Moody’s Analytics expects a 5% nationwide home price drop—including a 15% to 20% drop in America’s most “overvalued” regional housing markets. While Zandi doesn’t expect a 2008-style housing bust, he’s closely monitoring the situation.
What pushed the housing market over the top? A combination of sky-high home prices, which have become detached from underlying economic fundamentals, and soaring mortgage rates that have caused homebuyers to finally push back. Buyer demand is falling—fast.
Over the past six months, the average 30-year mortgage rate has spiked from 3.1% to 6.28% as the Federal Reserve flipped into inflation-fighting mode. Mortgage rates are now at their highest level since 2008. The 3.18 percentage point jump also marks the biggest upward swing in mortgage rates since 1981—a year that saw the average 30-year fixed rate notch above 18% as the Federal Reserve successfully worked to tame the inflationary period that took off during the ’70s.
View this interactive chart on Fortune.com
Rising mortgage rates mean some borrowers, who must meet lenders’ strict debt-to-income ratios, lose their mortgage eligibility altogether. Others, just have to pony up more—a lot more.
If a borrower took out a $500,000 mortgage in June 2021 at the then average fixed rate of 3.1%, they’d owe $2,135 per month. At a 6.28% rate, that principal and interest payment comes in at $3,088. But that’s assuming flat home price growth. Now let’s say that house saw price growth of 20.6% (i.e., the latest year-over-year reading for home price growth). That would push the mortgage to $603,000. At a 6.25% fixed rate, a $603,000 mortgage comes with a $3,725 monthly payment. Going from $2,135 to $3,725 is a 74% jump.