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Mortgage Rates Hit a 20-Year High of 6.92%

According to Freddie Mac, mortgage rates reached a 20-year high last week due to rising interest rates, now at a whopping 6.92%. The Federal Reserve is continuing its aggressive monetary policy to squash surging inflation, sending shockwaves throughout the housing market.

The federal funds rate is projected to reach 4.4% by the end of 2022. Russia’s invasion of Ukraine, supply chain issues and record low interest rates during the pandemic led to unprecedented inflation, prompting the Fed’s policy initiative.

While the Fed continues to wrangle with inflation, the housing market is especially feeling the pinch of higher interest rates. The S&P 500 and the New York Stock Exchange also fell 20% from this time last year as a result of these rate hikes. The declines have continued for several weeks.

Despite the Fed’s efforts, the consumer price index has not significantly budged. The index rose to 8.2% in September, far from the Fed’s eventual target of 2%.

For the last 15 years, mortgage rates in the U.S. have been relatively low. Thirty-year fixed mortgage rates were notably low during the previous two years, hovering between 2.5% and 3.5% between 2020 and early 2022.

However, mortgage rates spiked in recent weeks. As of Oct. 13, the thirty-year mortgage rate is at a two-decade high of 6.92%. The fifteen-year rate is at 6.09%.

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Freddie Mac’s chief economist Sam Khater released a statement regarding the rates.

“Rates resumed their record-setting climb this week, with the 30-year fixed-rate mortgage reaching its highest level since April 2002. We continue to see a tale of two economies in the data: strong job and wage growth are keeping consumers’ balance sheets positive, while lingering inflation, recession fears and housing affordability are driving housing demand down precipitously. The next several months will undoubtedly be important for the economy and the housing market.”

The Fed has been clear about its plan to continue increasing the federal funds rate until prices begin to level out. Mortgage rates tend to rise alongside the federal funds rate.

In September, the chairman of the Fed, Jerome Powell, said there is no way to avoid the rising unemployment and slowing growth that will follow the Fed’s current monetary policy. The consequences of out-of-control interest rates may be even more disastrous for the economy than necessary rising interest rates. The Fed estimates unemployment will climb to 4.4% in 2023 and 2024, up from the current rate of 3.5%.

“We have to get inflation behind us. I wish there were a painless way to do that. There isn’t.”

Some experts are taken aback by how quickly mortgage rates are rising. Economist Matthew Speakman from Zillow told ABC News that “few could have predicted exactly how far and how fast they have risen.”

“There’s not a lot of incentive for rates to come down dramatically in the near-term, but that doesn’t necessarily mean they’re going to keep running away at this pace.”

The relationship between homebuyer behavior and rising mortgage rates is complicated. In general, higher mortgage rates reduce demand, which drives down the prices of homes. Real estate prices are falling, but not as rapidly as expected, in the face of the skyrocketing mortgage rates.

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Daryl Fairweather, an economist at Redfin, spoke on the complexity of the current housing market.

“It’s like a standoff between buyers and sellers. Buyers can’t afford higher prices, and sellers don’t want to sell for lower prices.”

Recession worries, rising inflation and high-interest rates have made things appear bleak, but many experts believe mortgage rates will not continue to skyrocket. Lawrence Yun, the chief economist at the National Association of Realtors, predicts that rates will hover around the resistance point of 7%.

“We don’t want to see a bursting out of that second resistance and going up, because you’re talking about 8.5% mortgage rates, something that we clearly do not want to see. The 7% interest rate could be the new normal.”

In July, Yun released a statement predicting that higher mortgage rates will persist as long as the high inflation rate persists.

“If consumer price inflation continues to rise, then mortgage rates will move higher. Rates will stabilize only when signs of peak inflation appear. If inflation is contained, then mortgage rates may even decline somewhat.”

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US Home Prices Decline at Fastest Pace Since 2008 Financial Crisis

We are in the middle of the most significant two-month drop in home prices since shortly after the collapse of the Lehman Brothers in September 2008. Prices have been declining at the fastest pace since the Great Recession, prompting some experts to believe we are entering a housing market correction.

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Homebuilder Sentiment Falls for Ninth Consecutive Month

U.S. homebuilder confidence in the housing market dropped to its lowest level since the beginning of the COVID-19 pandemic. Experts believe the high inflation rate and rising borrowing costs are contributing to first-time homebuyers’ hesitancy to purchase new single-family homes.

The National Association of Home Builders/ Wells Fargo Housing Market Index, which measures the activity of the single-family housing market, fell to 46 in September after declining for the ninth consecutive month. The last nine months are the most prolonged and persistent decline in builder sentiment in the last four decades.

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Experts say a Housing Market Index above 50 shows a healthy market with net positive growth. In November 2020, the index rose to 76, the highest in 35 years, due to the Federal Reserve pushing the federal funds rate to nearly zero. After the pandemic’s dampening effect, the Fed’s loosening of the federal funds rate was meant to stimulate the economy back to health.

Recently The Federal Reserve has been raising interest rates by adopting an aggressive monetary policy to bring the inflation rate back down to sustainable levels. A lack of supply due to construction costs fueled by those interest rates has slowed down building into a housing recession.

NAHB chairman Jerry Konter said builders are responding to a falling market by using incentives to bolster sales, “including mortgage rate buydowns, free amenities and price reductions.”

Pantheon Macroeconomics analyst Ian Shepherdson believes that builder sentiment will continue to decline.

 “This probably will not mark the bottom of the cycle, given the latest surge in mortgage rates above 6%. The rate of fall of mortgage applications slowed over the summer, but the early September numbers point to a renewed sharp decline.”

Mortgage rates have skyrocketed to those seen during the 2008 housing crisis, with interest rates on 30-year fixed loans hitting 6%. According to data released from the Mortgage Bankers Association, mortgage rates have already risen 4% so far this year.

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This increase in mortgage rates would add $389,000 in interest payments to the life of a $500,000 single-family home purchase. The association’s data also showed that the seasonally adjusted MBA Purchase Index rose only 0.2%. New applications for mortgages went down  1.2%.

Though builder sentiment often signals the eventual direction of mortgage applications, NAHB CEO Jerry Howard told Fox Business that people should have confidence that the housing market will pick back up again.

I think you’re seeing a weakening in virtually every market, but those that were stronger are weakening less. I guess the most important thing that investors and people need to remember is that Americans still want to own their homes and that, as soon as the conditions turn a little more favorable, housing will pick up. That will pick up the whole economy.”

housing market

Home Sale Cancellations Seeing Highest Rates Since Start Of Pandemic

According to a new report by real estate brokerage company Redfin, 60,000 agreed home purchases fell through nationwide in June, which is equal to 14.9% of total homes that went under contract in the month.

That number is the highest since the COVID-19 pandemic began in March and April of 2020, where 17.6% and 16.4% of houses under contract fell through, respectively.

This month’s rate rose from 12.7% in May and 11.2% in 2021. “The slowdown in housing-market competition is giving homebuyers room to negotiate, which is one reason more of them are backing out of deals,” Redfin deputy chief economist Taylor Marr explained.

“Buyers are increasingly keeping rather than waiving inspection and appraisal contingencies. That gives them the flexibility to call the deal off if issues arise during the homebuying process.”

Marr additionally noted that raised mortgage rates are playing a role in cancellations. “If rates were at 5% when you made an offer, but reached 5.8% by the time the deal was set to close, you may no longer be able to afford that home or you may no longer qualify for a loan,” he said.

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The Federal Reserve previously raised its benchmark interest rates to 0.75% on June 15 in an effort to lower the now-9.1% inflation rate. With a possible recession on the horizon, it clearly impacted buyers who found themselves on the cusp of securing a property.

“When mortgage rates shot up to almost 6% in June, we saw a number of buyers back out of deals,” Miami Redfin mortgage agent Lindsay Garcia recounted, saying some buyers could no longer get a loan due to the rate jumps. “Buyers are also more skittish than usual due to economic uncertainty.”

Among the markets that saw the highest percentage of pull-outs during a pending sale include Las Vegas (27.2%) and several Florida cities like Lakeland (26.7%), Cape Coral (25.7%), Port St. Lucie (25.7%), and Jacksonville (25.3%).

Unlike Southwest metro areas, the Northeast saw a minimal loss of sales with Newark, New Jersey, Rochester, New York, Nassau County, New York, and Montgomery County, Pennsylvania all at or below 6%.

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As Fox News notes, homebuilders are also experiencing cancellations. A survey conducted by John Burns Real Estate Consulting (JBREC) in June found that cancellation rates of new builds flew up to 14.5%. That’s up from 10.4% this past May and 6.5% in June of 2021. Total home sales also fell by 31%.

The increased mortgage rates have also seen the average amount of home purchase loans diminish. The week ending on July 8 saw total mortgage application volume hit 1.7%, while the loan size fell to $415,000. Mortgage applications to buy a home fell by 4%.

However, 30-year fixed mortgage rates finally saw a win by cooling off to 5.3%, which Redfin reports is the largest one-week drop since 2008. That should give potential buyers an opening to save before rates increase again.

Federal Reserve

Federal Reserve Raises Interest Rates By 0.5% In Largest Move Since 2000

On Wednesday, the Federal Reserve raised short-term interest rates by 0.5% to 1.00%, marking the largest increase in over two decades as it attempts to fight the ever-increasing inflation that has continued to cause financial burdens for Americans.

Since 2000, the Fed has only raised interest rates in increments of 0.25%. “Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher energy prices, and broader price pressures,” the Fed said in a FOMC statement. “The Committee is highly attentive to inflation risks.”

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In March, inflation rates rose to 8.5%, up 0.6% from February’s 7.9% and 1.5% from December’s 7%. It’s now the highest inflation rate the country has seen since the 1980s, though forecasts project a downturn over the coming months. The increased interest rates will take time to lower the inflation, however.

The Fed explained it’s monitoring the situation of the 10-week-old Russian invasion of Ukraine — citing “tremendous human and economic hardship” — among other global issues that have essentially stalled production and sent the supply chain spiraling.

“The invasion and related events are creating additional upward pressure on inflation and are likely to weigh on economic activity. In addition, COVID-related lockdowns in China are likely to exacerbate supply chain disruptions.”

As for what this all means for the average citizen, borrowing will become more expensive. Higher interests rates will occur for mortgages, student debt, car loans, credit cards, and business loans for both small and large companies.

Higher mortgage rates are a particularly hard pill to swallow for those in the already difficult-to-navigate real estate market, as home prices alone have shot up during the COVID-19 pandemic. In the first quarter of 2021, the average home sold for $507,800.

Currently, a 30-year fixed-rate mortgage rate sits at over 5%, up from 3.10% in early-December and 4.16% in mid-March. The Fed will now discuss increased interest rates between 0.75% to 1.00% in June and July, while some officials have advocated for raising rates to 2.5% by the end of 2022.

Following the Fed’s announcement, the Dow Jones Industrial Average spiked up 900 points to 34,064 before dropping 1,000 points Thursday morning, or 2.9%. The S&P 500 saw a 3.3% drop, while the Nasdaq Composite fell 4.6%. Similarly, Google’s parent company, Alphabet, had a 5.3% slide.

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Speaking Wednesday, Fed Chairman Jerome Powell attempted to relay that the bank understands the financial hardship Americans are going through, and explained the raising interests rates were done in order to relief that inflation tension. “Inflation is much too high, and we understand the hardship it is causing,” Powell said.

Powell also emphasized his belief that the economy can withstand the higher rates, with unemployment rates dropping by 0.2% from February to March and total job openings rate at 7.1%, a year-over-year increase of 1.6%. “Nothing about it says it’s close to or vulnerable to a recession,” he said.

President Joe Biden has previously supported the Fed’s monetary decisions. “The Federal Reserve provided extraordinary support during the crisis for the previous year and a half,” he said back in January. “Given the strength of our economy and pace of recent price increases, it’s appropriate — as Fed Chairman Powell has indicated — to recalibrate the support that is now necessary.”

The actions aren’t without concerns, however. As the Associated Press notes, many have criticized the Fed for taking too long to tackle inflation, leading to doubt from analysts that a recession can ultimately be avoided.

Home Sold

Redfin Predicts More Balanced Housing Market, Slower Price Growth In 2022

For those that have been frustrated by the one-sidedness of the real estate market in the past months, the Newy Year should bring you some peace. According to Redfin chief economist Daryl Fairweather, 2022 will see a more balanced housing market.

While Fairweather warned that it won’t entirely be a buyer’s market, there will be more selection and slower price growth. Stalled price growth is a particularly needed occurrence – since 1965, home prices have gone up 118%, while they jumped 25% from 2008 to 2021.

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So, how will prices slow in spite of the jumps they’ve taken in past decades? Fairweather explained that rests in the hands of mortgage rates, which he predicts will rise from 3% to 3.6% due to “pandemic subsiding and lingering inflation.”

“By winter, higher mortgage rates along with already high home prices will likely slow annual price growth down to around 3%, which represents a steep drop from the record 24% increase posted in May 2021.”

With higher mortgage rates, Fairweather said, first-time home buyers will have better chances at grabbing a property while other potential buyers could be discouraged. It would be a welcomed change for first-time buyers, who had tough sledding in 2021.

According to the National Association of Realtors, first-timers made up just one-quarter — or 26% — of the market in November. That mark was the lowest since Jan. 2014. NAR noted first-time buyers made up 33% of home sale buyers in 2020.

While home prices will slow, they won’t stop increasing entirely. Economists and industry leaders who participated in NAR’s Real Estate Forecast Summit predicted prices to rise 5.7%. NAR’s forecasts expect prices to rise, but while remaining under 5%.

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Fairweather made a number of other predictions for 2022, which includes rents raising by 7%. The economist sees several reasons why renting will be in higher demand, such as people choosing to live in cities where renting is common and more people moving to cities due to a strong labor market.

A 7% rental increase would be sizeable compared to previous years. In 2020, the median gross rent rose only 2.6%, while rental rates rose 31% of the past 10 years – an average of 3.1% per year. Redfin’s deputy chief economist explained that millennials will likely be forced to fall back on renting due to high affordability.

“Home prices will remain at record highs requiring hefty down payments at the same time rising mortgage rates will make home buying more expensive, so many potential first-time homebuyers will choose to keep renting.”

Fairweather also believes that politics will play a role in real estate movements, with people relocating to places where their beliefs are more accepted. While the feuds over mask mandates and vaccinations have made states much more diverse to live in, older political debates — such as abortion and pro-guns — while also influence homeowners.

A Redfin survey found that one in seven recent movers said they wouldn’t move to a state where abortion is fully legal. Home values also vary depending on a state’s alignment, giving an additional factor for movers to consider – 77%, or over $20 trillion, of the total U.S. residential real estate value lies in blue states, while red states account for just $7 trillion.

Real Estate Agent

What Real Estate Experts Are Predicting For The Rest Of 2020

The coronavirus pandemic has obviously flipped a lot of businesses and industries on their heads this year. One of the biggest being the real estate market in America. At the end of every year real estate experts take to MarketWatch and other reputable platforms to tell clients and investors their predictions for the new year in regards to mortgage and real estate trends in general. It’s safe to say that the predictions made at the end of 2019 likely didn’t hold up, but that doesn’t necessarily mean all the current trends are bad.

One of the biggest predictions was that mortgage rates would stable out and remain relatively the same throughout the country. Instead, once Covid-19 began infecting Americans in February, sellers began pulling their property listings and buyers began pulling out due to fears of infection. This led to a decrease in the average mortgage rates in the country, dropping nearly a whole percent when compared to last year. As of right now, real estate experts expect that percentage to continue to drop as time and the pandemic progresses.

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One prediction that is proving to be true is the low inventory rates of homes to purchase in America. 2019 already saw a decrease in the amount of properties available for sale when compared to 2018, hence the prediction that this pattern would continue. As previously mentioned, many buyers and sellers have pulled out of potential listings due to health concerns; as a lot of real estate interactions need to happen in person. While it’s predicted that this pattern will continue, social distancing measures, facial coverings, and new technology that allows prospective buyers to take virtual tours of potential properties is keeping the industry alive.

Agents also predicted that a lack of affordability in properties would cause a lot of sellers to turn away from certain deals. This prediction is also proving to be true as home prices are currently increasing at a faster rate than there are buyers in the market. Again, the lack of buyers is mainly due to the pandemic, however, the prediction that this would occur shows that the industry is already in a tough spot when it comes to pricing. Lawrence Yun is a chief economist who recently spoke with MarketWatch about how he predicts this trend to turn around by the end of the pandemic.

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“Home sales should pick up with the economy reopening. But, new home construction needs to robustly ramp up in order to meet rising housing demand. Otherwise, home prices will rise too fast and hinder first-time buyers, even at a time of record-low mortgage rates.”

Another prediction that unsurprisingly came true was an increase in 3D/virtual home tours. Even before the pandemic became a reality, agents were predicting back in 2019 that virtual property tours and real estate deals would become more popular this year. Initially, they based this prediction on out-of-state/country buyers who were making large moves to new places but didn’t want to wait to start viewing properties. It’s predicted that this new technology will only grow to be more popular as the pandemic continues, but also after it ends.

It’s likely that once the coronavirus is no longer an issue, many industries will continue out implementing the health and safety procedures they were forced into to curve the spread due to how safe it makes everyone feel in general. The real estate industry specifically has had to deal with many national, and international, emergencies that have hindered sales and business, so when it comes to recovery, like all industries, it’s going to take time.

Selling Home and keys

Supply of Homes for Sale Slumps in December

The final month of 2019 saw a greater slump in real estate sales than previously anticipated by the market. With the holiday season in tow, December is never a popular time to list a home for sale – however this past month’s supply of homes for sale was 12% lower when compared with the same month in 2018, according to realtor.com. This was also a much steeper decline than the 9.5% drop witnessed in November.

As expected, the shortage of homes for sale has taken the biggest hit at the low end of the market, but the drain in supply is actually accelerating across all markets, including the most expensive properties. The end of the year saw the supply of entry-level home priced at less than $200,000 drop more than 18% annually, compared to the 16.6% drop witnessed in November. Midrange houses priced between $200,000 and $750,000 dropped 10.2% annually, compared with November’s decline of 7.4%, while the top end houses priced over $1 million reported a drop of 4.4% annually compared with November’s 2% slump. The median listing price on a U.S. home is currently just under $300,000.

While low-cost homebuilders are continuing to tap into a market of millennials – around 4.8 million of whom will be turning 30-years old in 2020 and looking to buy for the first time – the supply of houses being built and listed simply isn’t able to meet the sizable demand.

The drop noted in December suggests continuing unevenness in the housing market, with many predictions expecting historically low levels of houses for sale to come. December’s slump represents a loss of approximately 155,000 listings, compared to the same period in the previous year, and the amount of new listings is decreasing as well.

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So what is causing this difficult time for the housing market? Higher prices are discouraging many potential movers from listing their homes; increasing numbers of older homeowners are choosing to stay where they are rather than selling their property; and a large number of investors have spent the past decade transforming previously sellable homes into rental properties, which has removed them from the market for prospective buyers.

Real estate is a local business however, meaning not all markets are encountering the same effects. While areas such as California, Seattle, San Francisco and San Jose all encountered a 30% drop in inventory in December, the major markets of San Antonio, Las Vegas and Minneapolis-St. Paul saw their supply of for-sale homes increase. This may appear to suggest that the struggling locations have simply faced an unfortunate year, but the problem is far more widespread than just a few bad districts.

Demand for houses will inevitably increase into the year. With mortgage rates still low potential buyers have greater purchasing power available, but this short supply is likely to push prices up across the board, and currently the majority of new homes in the U.S. are already on the mid to high end of the scale. While many builders are beginning to develop lower-cost properties, as well as ramping up production in general, it will likely be some time before their efforts begin to make a real impact across the market.

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So what next for the housing market? If you believe the gloomiest predictions, the U.S. could be due for another market crash. Just like in 2008, slow wage growth has made it difficult for potential buyers to keep up with the rising house prices. Property sales are currently expected to drop by 1.8% this year, and it’s likely that potential buyers pull out as they struggle to afford the few properties on sale. Combined with a greater uptake of low mortgage rates, this does not paint a pretty picture for real estate. As sales decline, prices may follow – this could leave buyers struggling to make payments on houses that were too expensive for them in the first place.

This is a worst-case scenario prediction however. New homes are being built across the country and the rate is increasing – construction began on 1.37 million new homes in November 2019, a 3.2% increase on October’s numbers and a 13.6% increase on the same month a year prior. If these numbers are accurate and production is successfully ramped up, the construction industry may be able to alleviate the strain that the housing market is currently facing.

Right now, the best advice may be for prospective buyers to hold on to their cash. Low mortgage rates may seem tempting, but the lack of houses available will mean paying out an unjustifiable fee overall. The situation may improve further into the year as more and more properties are built, but if possible it’s worth waiting to see if the market steadies out over the coming years before making such a sizable investment.