Surging mortgage rates and still-high home prices are not leaving already demoralized home shoppers much to be thankful for these days.
Indeed, the national average 30-year mortgage rate has lost a tiny bit of steam over the last few weeks, but not before rates had already catapulted to a 23-year high of 7.79% at the end of October, according to Freddie Mac.
The 30-year fixed rate dropped to 7.29% in the week ending November 22, the fourth consecutive week of decreases. For some context, mortgage rates were in the low 3% range only two years ago.
In the face of high home prices and rates, monthly existing-home sales sagged for the fourth consecutive month. Sales dropped by 2% in September compared to 0.7% the previous month, with all four major U.S. regions posting declines, according to the National Association of Realtors (NAR).
Nonetheless, the housing market remains competitive as demand continues to outpace supply. Would-be buyers with the stomach to stay in the market are gobbling up the limited inventory, especially new homes, as builders continue offering incentives to hopeful homeowners.
So far, the fall housing market season has been a real turkey thanks to a mortgage rate trajectory that seems to know no bounds, elevated home prices and tight housing inventory—a trifecta of headwinds perpetuating the housing affordability crisis.
And a potential government shutdown looms closer, which would further cripple housing market activity.
Yet, there was a speck of good news to be thankful for.
Though widely expected, the Federal Reserve pressed pause on raising the federal funds rate at its latest meeting. The federal funds rate is the benchmark interest rate financial institutions charge each other for overnight loans. The rate hovered near 0% in March 2022. Then the Fed began raising rates to bring down inflation to a 2% goal.
Housing market stakeholders care about the federal funds rate as it tends to influence the trajectory of mortgage rates indirectly. For instance, mortgage rates have doubled since the Fed began its aggressive rate-hiking campaign a year and a half ago.
The Fed voted to keep the federal funds rate unchanged at its penultimate two-day meeting for the year.
The November decision was the second straight rate pause after policymakers skipped a rate hike in July. After 11 interest rate hikes in this tightening cycle, the current rate range remains between 5.25% and 5.5%, the highest in 22 years.
Fed projections suggest the terminal federal funds rate will reach 5.6% by the end of 2023, implying one more 25 basis-point rate increase is on the table for this year. A basis point is one-hundredth of one percentage point.
Yet, housing market experts are less concerned about one more interest rate hike this year than what the Fed has in store for rates in the coming years.
“Right now, it’s more about what the Fed intends to do rather than what it does,” says Keith Gumbinger, vice president at mortgage website HSH.com. “[W]hile not meaningless, another quarter-point hike at this point won’t change the big picture much, as a lot of the ‘damage’ from higher interest rates is either done or is already in process.”
Gumbinger says what matters most is how long policymakers plan to keep rates elevated and when they’ll begin implementing rate cuts.
Though most experts believe that two rate-hike pauses in a row are a sign that the Fed is finally done with increases, Fed policymakers reiterated at the November post-meeting presser that achieving the goal of a sustainable 2% inflation rate still has “a long way to go.”
Given that outlook, Fed chair Jerome Powell unsurprisingly put the kibosh on the possibility of rate cuts happening soon, suggesting the current high rate range will remain in place for the time being.
Consequently, many housing market watchers forecast mortgage rates remaining elevated for the remainder of this year—and possibly into 2024.
For a housing recovery to occur, Gumbinger says several conditions must unfold.
“For the best possible outcome, we’d first need to see inventories of homes for sale turn considerably higher,” Gumbinger says. “This additional inventory, in turn, would ease the upward pressure on home prices, leveling them off or perhaps helping them to settle back somewhat from peak or near-peak levels.”
And, of course, interest rates would need to cool off.
But Gumbinger says don’t hope they cool too quickly. Rapidly falling rates could create a surge of demand that wipes away any inventory gains, causing home prices to rebound.
“Better that rate reductions happen at a metered pace, incrementally improving buyer opportunities over a stretch of time, rather than all at once,” Gumbinger says.
He adds that mortgage rates returning to a more “normal” upper 4% to lower 5% range would also help the housing market, over time, return to 2014-2019 levels.
Yet, Gumbinger predicts it could be a while before we return to those rates.
With the average 30-year fixed mortgage rate closing in on 8%, a 5% mortgage rate seems like a distant dream.
Despite rates moving steadily upward in the second quarter, mortgage originations hit $463 billion after amounting to only $333 billion in the first quarter, according to Mortgage Bankers Association (MBA) data.
Yet, much has changed in only a matter of months.
By the end of June, the 30-year fixed rate landed at 6.71%, a bargain rate compared to today’s high-7% range.
Given this, the MBA expects originations to decline and remain muted through the rest of 2023.
Today’s mortgage spread—the gap between the 10-year Treasury bond yield and the 30-year fixed rate mortgage—is hovering near 300 basis points. Given historical trends, the spread should be between 150 and 200 basis points. A more normalized spread would likely prompt more would-be home buyers to re-enter the market.
However, when the spread will begin to narrow is up in the air.
“It’s possible that the spread will decrease when the Fed finishes its monetary tightening, which could be in the coming months,” said Odeta Kushi, deputy chief economist for First American, in a recent report. “[I]f the spread narrows, then mortgage rates could come down even if the benchmark 10-Year Treasury stays the same.”
With many homeowners “locked in” at low interest rates or unwilling to sell due to high home prices, demand continues to outpace housing supply—and likely will for a while.
Despite a slight uptick in resale homes, housing stock remains at near historic lows—especially entry-level supply—consequently propping up demand and sustaining ultra-high home prices.
In the meantime, the monthly supply of new homes, which has been helping to pick up some of the slack, continues on a slow but steady decline that began last fall.
“Inventory is approximately 46% below the historical average dating back to 1999,” says Jack Macdowell, chief investment officer and co-founder at Palisades Group. “We think that it is highly unlikely that the inventory problem will be resolved in 2023.”
After slipping in August, existing-home stock saw a bump of 2.7% in September, according to NAR. This increase was enough to boost month-over-month unsold inventory by 0.1%. Even so, re-sale inventory currently sits at a scant 3.4-month supply at the current sales pace. Many experts say a balanced housing market has four to six months of inventory.
This blip of an inventory increase comes on the heels of a 2.2% sales drop in September compared to August, down 0.7% in August and a whopping 15.4% from a year ago.
Save for a slight bump in April, year-over-year home sales have trended down markedly since February of this year—and the near term isn’t showing much promise for improvement. Pending home sales—a gauge for future existing-home sales—which inched up by 1.1% in September were down 11% from a year ago.
“Despite the slight gain, pending contracts remain at historically low levels due to the highest mortgage rates in 20 years,” said Lawrence Yun, chief economist at NAR in a press statement.
Despite these historic lows, high home prices remain steady due to the ongoing constrained inventory situation.
Given the slim pickings of existing homes, new homes remain the flavor of the month for hungry home buyers.
At the current sales rate, the seasonally adjusted estimate of new houses for sale was 435,000 at the end of September, representing 6.9 months of supply at the current sales pace, down from 7.7 in August and 9.7 a year ago, according to the latest data from the U.S. Census Bureau and U.S. Department of Housing and Urban Development (HUD).
The lack of resale homes boosted new home sales despite soaring mortgage rates.
Sales of new single-family homes jumped 12.3% to a seasonally adjusted annual rate of 759,000, based on early estimates. The last time sales numbers were this high was in February 2022.
In the face of high mortgage rates, a month-over-month dip in the median sales price of new homes from $433,100 to $418,800 also lured buyers.
Even so, the new home supply is just a drop in the bucket.
“[T]o see a big change in the real estate market, we need more than just new builds,” Dan Hnatkovskyy co-founder and CEO of NewHomesMate, a marketplace for new construction homes. “We need a lot more houses available for sale, something that the new construction market can’t do all by itself.”
The new home sector is going strong—for the moment.
Despite strong demand, ominous signals loom in the construction realm, revealing home builder skittishness amid escalating mortgage rates and other industry challenges.
Builder confidence continued its trend downward for the third consecutive month, following a seven-month streak of increases.
The most recent National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI) that tracks builder sentiment sank from an adjusted reading of 44 in September to 40 in October, putting builder confidence squarely into negative territory. A reading of 50 or above means more builders see good conditions ahead for new construction.
Prompted by rising mortgage rates that just won’t quit, builders continue to lower home prices to boost sales. Once again, roughly one-third of builders cut prices in October—the highest since December 2022. To further sweeten the pot, 62% of builders reported offering all forms of buyer incentives in October, up from 59% in September.
Despite these carrots, still-high prices and mortgage rates are keeping buyers away.
“Builders have reported lower levels of buyer traffic, as some buyers, particularly younger ones, are priced out of the market because of higher interest rates,” said Alicia Huey, chairman of NAHB, in a press statement.
Housing affordability dropped to a new historical low in August, according to the NAR Affordability Index, with home buyers facing the worst affordability conditions in nearly four decades.
Given this, it’s not surprising that, in September, 84% of consumers reported putting home-buying plans on hold, according to the latest Fannie Mae Home Purchase Sentiment Index (HPSI). That’s up 2% from the previous month.
“Consumers are also not seeing much affordability relief in sight, as they continue to expect home prices to increase in the next 12 months,” said Doug Duncan, Senior Vice President and Chief Economist at Fannie Mae, in a press statement. “They also indicated that their personal economic situations are showing signs of strain, including lower year-over-year household incomes and a reduced sense of job security.”
Duncan says this all suggests home purchase affordability will remain a problem for the foreseeable future.
Other indices also paint a bleak picture.
For instance, the typical monthly mortgage payment is at an all-time high of $2,866, according to a Redfin report. The figure was $2,395 a year earlier.
The Federal Reserve Bank of Atlanta National Home Ownership Affordability Monitor (HOAM) Index also plummeted in August to an all-time low of 67.3. A reading below 100 indicates that median household income cannot cover annual costs associated with owning a median-priced home or more than 30% of yearly income is going towards homeownership. An individual’s total housing costs should be at or below 28% of their gross income.
To put today’s affordability challenges into context, a homeowner living in a typical metro area during the second quarter of 2023 needed to earn at least $99,600 to afford monthly housing payments, up from $52,600 three years ago, according to Harvard Joint Center for Housing Studies data.
First-time buyers hoping to land a home at a lower price point are likely having the hardest time.
Starter home costs are on an upward trajectory that has put homeownership further out of reach for those already constricted by limited down payment savings and incomes that can’t keep pace with costlier monthly payments, according to Realtor.com data.
For example, first-time homebuyers hoping to buy a starter home will need to earn about $64,500 a year—that’s 13% more than a year ago, according to a Redfin report. A typical starter home hit an all-time high of $243,000 in June.
Weakening affordability conditions for first-time buyers is further underscored in NAR’s latest First-Time Homebuyer Affordability Index. The preliminary second-quarter reading came in at 61.4, compared to 67.4 in the first quarter. A reading of 100 indicates that a family earning a median income earns exactly enough to qualify for a mortgage and afford a typical home.
In other words, the typical first-time homebuyer is nowhere near earning the level of income required to afford a home.
Despite some areas seeing price declines, the likelihood of a housing market crash—a rapid drop in unsustainably high home prices due to waning demand—remains low. Experts point out that today’s homeowners stand on much more secure footing than those coming out of the 2008 financial crisis, with many borrowers having positive equity in their homes.
Even so, with fewer homes selling, Hnatkovskyy sees a price collapse within the realm of possibility, especially in markets where real estate investors scooped up numerous properties.
“If something pushes that over the edge, the consequences could be severe,” said Hnatkovskyy, in an emailed statement.
National home prices rose at an annual rate of 2.6% in August, up from 1% in July, according to the latest S&P CoreLogic Case-Shiller Home Price Index, a leading monthly tracker of U.S. home values. After seasonal adjustment, prices saw a monthly increase of 0.9%, between July and August, up from 0.6% between June and July.
The index hit a new high of 311.5, the highest level since recording began in 1987.
“On a year-to-date basis, the National Composite has risen 5.8%, which is well above the median full calendar year increase in more than 35 years of data,” said Craig J. Lazzara, managing director at S&P DJI, in the report. “The year’s increase in mortgage rates has surely suppressed housing demand, but after years of very low rates, it seems to have suppressed supply even more.”
Despite foreclosure activity trending up nationally, experts still do not expect to see a wave of foreclosures in 2023. Some 49% of mortgage-owned residential properties in the U.S. were equity-rich in the second quarter of 2023, according to a report from property data provider Attom.
In other words, the combined estimated market values for those properties were worth at least double the estimated loan balance amounts, providing homeowners a safe cushion from foreclosure.
In September, foreclosure filings were up 11% from August and 18% from last year, according to Attom. Foreclosure completions were up 29% from the previous month and 24% from a year ago.
“[F]oreclosure starts are nearly back to where they were two years ago when the federal government lifted a pandemic-related moratorium on most foreclosure filings, said Rob Barber, CEO at Attom.
The five states with the highest foreclosure rates in September were, from highest to lowest, Nevada, Maryland, South Carolina, Delaware and New Jersey.
Buying a house—in any market—is a highly personal decision. Because homes represent the largest single purchase most people will make in their lifetime, it’s crucial to be in a solid financial position before diving in.
Use a mortgage calculator to estimate your monthly housing costs based on your down. But if you’re trying to predict what might happen next year, experts say this is probably not the best home-buying strategy.
“The housing market—like so many other markets—is almost impossible to time,“ says Orphe Divounguy, senior macroeconomist at Zillow Home Loans. “The best time for prospective buyers is when they find a home that they like, that meets their family’s current and foreseeable needs and that they can afford.”
Gumbinger agrees that it’s hard to tell would-be homeowners to wait for better conditions.
“More often it seems the case that home prices generally keep rising, so the goalposts for amassing a down payment keep moving, and there’s no guarantee that tomorrow’s conditions will be all that much better in the aggregate than today’s.”
Divounguy says “getting on the housing ladder” is worthwhile to begin building equity and net worth.
Frick offers this expert advice to aspiring buyers:
Divounguy has this expert advice for sellers:
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