The unemployment rate may be at a record low, yet when it comes to the housing market, stocks and affordability, we are experiencing a very different trend.

For two years I have beaten the drum that mortgage rates are rising and that is going to hurt if you are a buyer — especially a cash-strapped first-time buyer or a retired buyer on a fixed income. It seems like that day has finally come, and it is having a large impact on our area’s housing market.

A booming real estate market in the first half of 2018 marked by record home prices and multiple contracts overshadowed the Federal Reserve’s steadfast changes to monetary policy. But by the second half of 2018, the 30-year mortgage rate had risen to levels we had not seen since before the 2008 housing crash. It probably did not help that by the end of 2018 the stock market had ended lower than where it began at the start of the year, meaning people’s wealth through investments and savings is stagnant at best. Once the flurry of the spring market came to an end, buyers seemingly overnight realized buying a home just got a lot more expensive, and many took a step back in unison around Labor Day.

The post-2008 housing market

Since early 2010, the Washington area has enjoyed a bustling, growing and dynamic market. The injection of stimulus into the economy from the federal government, along with fluid, easily accessible credit markets, government-backed loan programs and stock levels tripling in total value (bringing massive wealth to the buying class), has driven the bull market. Most notably the low mortgage rates at the time made it possible for average house hunters to buy in an expensive market (like ours) with little money down and the ability to stomach the monthly payments.

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The results have been predictable: For eight years, we have been operating in a market that allowed sellers to ask record prices year after year while leaving buyers largely undeterred. To be clear, the past eight years should not be classified as a “normal market” given that home prices in many neighborhoods have outpaced inflation by a lot. Yet if you are younger than 35, you probably do not know what it is like to try to buy a house with a mortgage rate above 5 percent or the necessity of putting no less than 10 percent down to qualify.

The new normal

Sometime around last September, it became obvious that houses, which just months before would have sold in the first weekend, were sitting on the market. They were desirable, priced in line with the market and well advertised.

I had a few listings in this category. In early fall, the stock market every few weeks would give back one to two months of gains in a day or two, leading to more volatility and concerns. To make matters worse, by Oct. 1 the best interest rate I could get my clients on a 30-year fixed loan was likely to be no less than 5 percent, and that assumed near perfect credit and sizable down payments.

So after eight years of 3, 3.5 and 4 percent mortgage rates coupled with down payments of 5 percent or less, borrowers were hit with the reality that buying a $700,000 house with a higher mortgage rate means hundreds of extra dollars in monthly payments and an allocation of a ton more of their savings (in down payment) to make the deal.

Right away that took a chunk of the would-be buyers out of the market — yet inventory levels of homes for sale did not adjust. Moreover, the new tax law in December 2017 took away some incentives — being able to deduct state and local taxes from federal taxes — which definitely impacted the market for homes $450,000 and over.

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The results: Markets flipped from sellers' advantage to buyers' advantage. Almost immediately, for every one buyer there were three really good houses to choose from and no urgency in being outbid. With little warning, buyers became king, yet most sellers refused to adjust. With fewer real buyers in the market, all of a sudden the inventory levels got thrown way out of whack.

The bottom line is this: The housing market across the country is contracting. I see it every day in my business, and I speak with dozens of top-performing brokers in other major markets who are saying the same thing.

Selling a house for top dollar, much less even selling at all in 2019, will require a ton more strategy and marketing than we have seen in a long time. And buying a place will mean getting well-prepared, navigating a market where many sellers will refuse to adjust their expectations, and finding the deal and lending solution that are right for you.

Do not be left without a plan in the new normal market.

Jonathan Fox, a Realtor with Compass, writes an occasional column on Washington-area housing market conditions.