Mortgage rates remained well above 7% on Thursday as markets digested Wednesday’s Fed meeting.
Freddie Mac‘s Primary Mortgage Market Survey, which focuses on conventional and conforming loans with a 20% down payment, shows the 30-year fixed rate averaged 7.19% as of Sept. 21, up one basis point from last week’s 7.18%. By contrast, the 30-year fixed-rate mortgage was at 6.29% a year ago at this time.
“Mortgage rates continue to linger above 7% as the Federal Reserve paused their interest rate hikes,” Sam Khater, Freddie Mac’s chief economist said.
Elevated mortgage rates weigh negatively on the housing demand, and by extension on homebuilders, Kharter added.
“Builder sentiment declined for the first time in several months and construction levels have dipped to a three-year low, which could have an impact on the already low housing supply,” he noted.
Other indices showed different mortgage rates this week.
HousingWire’s Mortgage Rates Center showed Optimal Blue’s 30-year fixed rate for conventional loans at 7.22% on Wednesday, compared to 7.16% the previous week. At Mortgage News Daily on Wednesday, the 30-year fixed rate for conventional loans was 7.33%, up from 7.22% the previous week.
Members of the Federal Open Market Committee expect interest rates to remain elevated for longer than had been expected
The Fed paused its rate hikes yesterday as several economic indicators — including the improved core CPI figures, lower job openings, and higher unemployment rate — point towards a cooling economy. However, members remained cautious and the committee’s updated outlook implies a forthcoming monetary policy that is “tighter for longer,” Jiayi Xu, economist at Realtor.com said.
“With the year-end projection for 2023 remaining at 5.6%, we are drawing closer to another potential rate hike as the year approaches its end,” she said.
Furthermore, the expected policy rate for the conclusion of 2024 and 2025 is now half a percentage point higher than what was anticipated back in June, reinforcing the trend toward a more restrictive monetary policy in the path forward.
While higher interest rates indicate additional hurdles to come for the housing market, the fall typically ushers in more favorable buying conditions compared to the rest of the year, according to Xu.
“For those looking to purchase a home in this tough year, the first week of October will emerge as the best time to make a move,” Xu said.
Historical data suggests that during this particular week, home prices tend to dip below their peak levels, competition subsides, and the housing inventory expands compared to the busy summer months, she explained.
Meanwhile, homebuyers who can’t afford to buy a house in today’s market can rely on renting as rental prices are going down.
It was bound to happen. Just as home builders began to feel more confident about attracting potential buyers, rising mortgage rates are proving too much for those customers.
After steadily rising for seven consecutive months, builder confidence retreated in August as rising mortgage rates nearing 7% (per Freddie Mac) and stubbornly high shelter inflation have further eroded housing affordability and put a damper on consumer demand.
Builder confidence in the market for newly built single-family homes in August fell six points to 50, according to the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI) released August 15.
Home Builders Need Workers, Buildable Lots and Distribution Transformers
“Rising mortgage rates and high construction costs stemming from a dearth of construction workers, a lack of buildable lots and ongoing shortages of distribution transformers put a chill on builder sentiment in August,” said NAHB Chairman Alicia Huey, a custom home builder and developer from Birmingham, Ala.
Huey said that other factors are helping support the demand for new construction.
“But while this latest confidence reading is a reminder that housing affordability is an ongoing challenge, demand for new construction continues to be supported by a lack of resale inventory, as many homeowners elect to stay put because they are locked in at a low mortgage rate.”
Housing Affordability Compared to US Median Income
Rising home prices and interest rates coupled with elevated construction costs, low existing inventory and solid demand resulted in a significant decline in housing affordability during the second quarter of 2023.
According to the NAHB/Wells Fargo Housing Opportunity Index (HOI), 40.5% of new and existing homes sold between the beginning of April and end of June were affordable to families earning the U.S. median income of $96,300. This is down from 45.6% posted in the first quarter of this year, and the second-lowest reading since NAHB began tracking affordability on a consistent basis in 2012.
Where to Buy? Affordable Housing Markets Around the Country
The Housing Opportunity Index shows that the national median home price increased to $388,000 in the second quarter, up from $365,000 in the previous quarter. Meanwhile, average mortgage rates rose from 6.46% to 6.59% during this period.
The top five most affordable major housing markets in the second quarter of 2023 were:
Lansing-East Lansing, Mich.
Scranton-Wilkes-Barre, Pa.
Harrisburg-Carlisle, Pa.
Indianapolis-Carmel-Anderson, Ind.
Pittsburgh, Pa.
Top five least affordable major housing markets—all located in California:
Los Angeles-Long Beach-Glendale
Anaheim-Santa Ana-Irvine
San Diego-Chula Vista-Carlsbad
Oxnard-Thousand Oaks-Ventura
San Francisco-San Mateo-Redwood City
Meanwhile, Cumberland, Md.-W.Va., was rated the nation’s most affordable small market, with 95.5% of homes sold in the second quarter being affordable to families earning the median income of $89,900.
The top five least affordable small housing markets were also in the Golden State. Tied at the very bottom of the affordability chart were Salinas, Calif., and San Luis Obispo-Paso Robles, Calif., where 6.5% of all new and existing homes sold in the second quarter were affordable to families earning the area median income of $100,400 in Salinas and $113,100 in San Luis-Obispo-Paso Robles.
NAHB Chief Economist Robert Deitz Calls for Government Action
Deitz said that government policies aimed at helping builders could help the housing shortfall. He said the shortfall is currently about 1.5 million housing units.
“Declining customer traffic is a reminder of the larger challenge that shelter inflation is up 7.7% from a year ago and accounted for a striking 90% of the July Consumer Price Index reading of 3.2%,” said NAHB Chief Economist Robert Dietz. “The best way to bring housing inflation down and ease the housing affordability crisis is to enact policies at all levels of government that will allow builders to construct more homes to address a nationwide shortfall of approximately 1.5 million housing units.”
Builders Again Pressed Into Using Sales Incentives
The August HMI survey also revealed that rising mortgage rates are causing more builders to use sales incentives to attract home buyers.
After dropping steadily for four months (from 31% in March to 22% in July), the share of builders cutting prices to bolster sales rose again to 25% in August.
The average decline for builders reducing prices remained at 6%. And the share of builders using incentives to bolster sales was 55% in August, higher than in July (52%) but still lower than in December 2022 (62%).
“Builder sentiment has shown that higher mortgage rates are contributing to a decline in buyer traffic, and rates need to stabilize to prevent the housing market from slowing,” added Alicia Huey, chairman of the National Association of Home Builders (NAHB). While the combination of high-interest rates, high pricing, and limited inventory is likely to continue … [Read more…]
U.S. homebuilder sentiment unexpectedly declined in August for the first time this year as high mortgage rates deterred prospective buyers.
The National Association of Home Builders/Wells Fargo gauge decreased six points to a three-month low of 50. The figure was below all estimates in a Bloomberg survey of economists.
Builder confidence had been on a tear this year as homeowners, reticent to move and relinquish their low borrowing costs, have kept resale inventory limited and encouraged buyers to seek out new construction. The latest figures suggest high mortgage rates — more than double where they were at the end of 2021 — are starting to bite into that demand.
“Rising mortgage rates and high construction costs stemming from a dearth of construction workers, a lack of buildable lots and ongoing shortages of distribution transformers put a chill on builder sentiment in August,” NAHB Chairman Alicia Huey said in a statement.
After months of having the upper hand, higher rates are also causing more builders to use sales incentives to attract buyers. Sentiment fell across all four major U.S. regions.
The indexes of current sales and prospective buyer traffic both decreased for the first time this year, while the expected sales gauge declined to the lowest level since April.
Data on July housing starts and building permits are due Wednesday.
Homebuilder confidence declined for the first time this year in August, reflecting the difficulties of 7% mortgage rates and reduced housing affordability.
The National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI) report showed that builder confidence fell 6 points from July to a reading of 50.
The HMI index is a monthly survey that gauges NAHB members’ perception of current single-family sales, expected sales for the upcoming six months, and potential homebuyer traffic. An index of 50 is neutral; higher than 50 indicates that builders view conditions as favorable.
“Rising mortgage rates and high construction costs stemming from a dearth of construction workers, a lack of buildable lots and ongoing shortages of distribution transformers put a chill on builder sentiment in August,” said Alicia Huey, NAHB Chairman and a homebuilder from Birmingham, Alabama.
Huey added that while housing affordability remains a persistent challenge, demand for new construction has been aided by a lack of resale inventory. Many homeowners are locked into low-rate mortgages and are staying put, she said.
In July, shelter inflation accounted for 90% of the Consumer Price Index’s reading of 3.2%, contributing to housing affordability challenges. The NAHB said builders need to be constructing more multifamily and single-family homes to cut into the decade-long inventory shortage.
“The best way to bring housing inflation down and ease the housing affordability crisis is to enact policies at all levels of government that will allow builders to construct more homes to address a nationwide shortfall of approximately 1.5 million housing units,” said Robert Dietz, the NAHB’s chief economist.
Additionally, high mortgage rates called for the return of sales incentives in August. After dropping steadily for four months (from 31% in March to 22% in July), the share of builders cutting prices to bolster sales rose again to 25% in August. The share of builders using incentives to bolster sales was 55% in August, higher than in July (52%). However, it was still lower than in December 2022 (62%).
The NAHB also reported that all three major HMI indices posted declines in August. Homebuilders’ gauge of current sales conditions fell 5 points to 57. The gauge measuring traffic of prospective buyers declined 6 points to 34. And the component charting sales expectations over the next six months fell 5 points to 55.
The three-month moving averages for HMI were mixed across the four major regions. The West edged down a single point to 50, the Midwest and the South remained unchanged, while the Northeast rose 4 points to 56.
In spite of a falling homebuilder confidence index, the Wall Street Journal reported this morning that Warren Buffett’s Berkshire Hathaway made a fresh bet on U.S. homebuilders in the second quarter. The company revealed new positions in D.R. Horton , NVR and Lennar, cumulatively worth more than $800 million at the end of June, when rates were still high but not quite 7%.
Homebuilder stocks have been at record highs in recent months.
For the third consecutive week, mortgage rates pushed past 3% – with the average mortgage rate for a 30-year fixed loan up four basis points last week to 3.09%, according to Freddie Mac’s Primary Mortgage Market Survey.
Rising mortgage rates typically signify a recovering economy, and despite applications for mortgages dropping week-over-week, Freddie Mac’s chief economist Sam Khater expects a 3% rate to sustain market interest for many potential buyers.
A number of economists say rising rates may just be what the industry needs to cool the insane housing demand the market has been struggling to maintain for months. Increased inventory was the initial hope. However, due to consistent materials supply shortages and lumber prices that are up about 200% since April 2020, builders’ confidence index dropped in March. Single-family housing starts declined last month.
“The elevated price of lumber is adding approximately $24,000 to the price of a new home,” said NAHB Chairman Chuck Fowke. “Though builders continue to see strong buyer traffic, recent increases for material costs and delivery times, particularly for softwood lumber, have depressed builder sentiment this month. Policymakers must address building material supply chain issues to help the economy sustain solid growth in 2021.”
Now, economists are keeping a watchful eye on the speed in which interest rates have risen, said Doug Duncan, Fannie Mae’s senior vice president and chief economist.
“Underlying Treasury rates have risen, though lenders have absorbed some of the rise by shrinking spreads, as confirmed by our recent Mortgage Lender Sentiment Survey results,” said Duncan. “While the rate rise will curtail refinances to some degree, 2021 is poised to be a good year overall for housing activity and housing finance, as the economy continues to recover and COVID-19 restrictions ease.”
Duncan said Fannie Mae is watching for risks around monetary and fiscal policy on interest rates moving forward, though none are an immediate threat as the Federal Reserve has not changed its FOMC statement for several months.
Nevertheless, mortgage rates remain near historic lows (they are still 0.8 percentage points below the 2019 average), but if the price of housing can’t cool in time, many first-time homebuyers may miss the chance to take out a record low rate. Despite this risk, Fannie Mae’s baseline view is that the recent rapid rise will not continue but that rates will drift only modestly higher over the remainder of this year.
“Essentially, we believe the Fed will keep policy accommodative for longer, not tightening until inflation clearly exceeds its 2.0-percent target for a substantial period,” Fannie Mae said. “This view is consistent with current market measures, such as Fed Funds futures, not anticipating any rate hikes until 2023 and, even then, at a slow pace.”
“Although builders continue to remain cautiously optimistic about market conditions, the quarter-point rise in mortgage rates over the past month is a stark reminder of the stop and start process the market will experience as the Federal Reserve nears the end of the ongoing tightening cycle,” said Robert Dietz, chief economist of NAHB. Dietz highlighted … [Read more…]
Builder sentiment in the market for single-family homes rose 1 point in July to 56, according to the National Association of Home Builders/Wells Fargo Housing Market Index.
It marks the seventh straight month of gains and the highest level since June 2022. A reading above 50 is considered positive sentiment.
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Builders say low supply in the resale market is driving demand for new construction, but higher mortgage rates and supply-side challenges continue to put pressure on the market.
“Although builders continue to remain cautiously optimistic about market conditions, the quarter-point rise in mortgage rates over the past month is a stark reminder of the stop and start process the market will experience as the Federal Reserve nears the end of the ongoing tightening cycle,” said Robert Dietz, NAHB’s chief economist.
The average rate on the popular 30-year fixed mortgage crossed over 7% briefly in May and then again at the end of June. It has only come down slightly in the last week. Those higher rates are straining affordability in the market, where prices for existing homes are rising yet again.
Of the NAHB index’s three components, current sales conditions in July rose 1 point to 62; buyer traffic increased 3 points to 40, the highest reading since June of last year; and sales expectations in the next six months fell 2 points to 60. The drop in expectations is due to that jump in interest rates and the resulting hit to affordability.
Despite higher mortgage rates, however, builders are using fewer incentives. Just 22% of builders reported cutting prices in July. This is down from 25% in June and 27% in May.
Sales of newly built homes in May, the latest reading available, jumped 13% compared with April and were 20% higher than May 2022, according to the U.S. Census Bureau. The median price was down over 7% from May of last year, but that median may be skewed by the mix of homes selling, which is currently leaning toward the lower end.
Newly constructed home sales and loan applications ticked down in June as buyers balked at higher mortgage rates, but activity remained above last year’s, according to the Mortgage Bankers Association.
Loan volume slowed slightly this month, reporting a 5% decrease since May, according to the MBA’s Builder Application Survey. But new home lending is holding strong year-over-year — applications are up 26.1% from last June.
Sales in this segment followed the same pattern: the BAS seasonally adjusted new single-family sales rate was 687,000 units this month, a 9% monthly decrease, but a 10.8% yearly increase. Unadjusted new home sales reached 60,000 in June, compared to 64,000 in May.
“New home purchase activity continues to be a bright spot, as both new home applications and home sales were up on an annual basis,” Joel Kan, MBA’s vice president and deputy chief economist, said in a press release. “Rising mortgage rates in June likely caused some pullback in purchases over the month.”
The average 30-year fixed mortgage rate hovered around 6.7% throughout June, according to Freddie Mac.
These rates have the biggest impact on the existing home market, where they are likely scaring away would-be sellers from listing, furthering the industry’s housing inventory problem. This June, there were 13.8% fewer homes for sale and 29.1% fewer newly listed homes than last year, according to Redfin data.
But the new home market has been stronger than expected, Doug Duncan, Fannie Mae’s chief economist, noted in his latest economic report.
Builder sentiment, on the other hand, is up this month according to the National Association of Home Builders/Wells Fargo Housing Market Index. It’s at its highest since last July.
“The lack of resale inventory means prospective home buyers who have not been priced out of the market continue to seek out new construction in greater numbers,” Robert Dietz, the chief economist at NAHB, said in an article about the index.
At the same time, Dietz says builders are worried about high mortgage rates and supply-side challenges despite recent cost stabilizations. New home construction rates soared in May, then shrunk back slightly in June.
The BAS said June’s average loan size was $400,281, marginally less than May’s average of $403,581. Conventional loans remain the most popular, making up 65.5% of all loans. Federal Housing Administration loans follow at 24.1%. FHA loans made up slightly more of the total loan pool in June, gaining some ground from conventional loans.
Both Department of Veterans Affairs and Department of Agriculture loan proportions remained unchanged, making up 10% and 0.3% respectively.
Although the Macroeconomic Outlook Remains Uncertain, the Homeownership Rate Continues to Grow, Particularly Among Below-Median Income Families
The overall increase in the total homeownership rate can be attributed to the strong growth in the below-median family income homeownership rate, which has sharply increased since 2016 from 48.0% to 53.4%
The U.S. economy is stalling as higher interest rates weigh on interest rate-sensitive sectors like housing. But the U.S. consumer has been resilient, and the broader economy has weathered several adverse shocks over the past year and a half, avoiding a recession so far. While housing market activity has slowed, the favorable demographic tailwind from a large cohort of potential first-time homebuyers has bolstered the market and led to some surprising trends in homeownership.
Recent developments in the U.S. economy
The U.S. Bureau of Economic Analysis revised Gross Domestic Product (GDP) growth upward 0.2 percentage points to an annualized rate of 1.3 % in the first quarter of 2023. Though this is the third consecutive quarter of positive GDP growth, the pace is slowing due to a continued drag in residential fixed investment. With the second estimate of GDP also comes the first estimate of Gross Domestic Income (GDI), which decreased 2.3% in the first quarter of 2023.
In theory, GDP and GDI should be identical as they are both estimates of aggregate output. GDP measures expenditures while GDI measures income; as a rule, aggregate expenditures always equals income. However, research has shown that the GDI measure can be more predictive of future output growth than GDP, and the Philadelphia Federal Reserve Bank’s GDPplus combines both GDP and GDI to produce a composite estimate.1 GDPplus as of May 25, 2023, estimates output growth at -1.4% and -1.2% for Q4 2022 and Q1 2023 respectively. If the GDPplus measure is accurate, then the U.S. economy has begun to contract; however, because employment remains strong, this implies that productivity must be falling.
The negative correlation between productivity and monetary policy has been studied in many recent academic papers, see for example Jordà et al. (2020) and Meier et al. (2022).2 Falling productivity was associated with the monetary tightening of the high-inflation episodes in the 1970s and early 1980s in the U.S., and negative output per hour growth preceded each of the recessions of that period. Output per hour growth in the U.S. has been negative since the first quarter of 2022.
Despite the potential contraction in activity indicated by GDI, the labor market remains resilient.
Despite the potential contraction in activity indicated by GDI, the labor market remains resilient. The unemployment rate did increase in May by 0.3 percentage points to 3.7%; the largest month-over-month increase since the onset of the COVID-19 pandemic. However, an increase in job openings caused the ratio of job openings to unemployed persons to jump up to 1.79 in April 2023 from 1.67 the month before. Despite the rise in the unemployment rate reported in the household survey, the establishment survey reported that nonfarm payrolls increased by 339,000 in May. In addition, average hourly wages increased 0.3% over-the-month, and 4.3% year-over-year to $33.44/hr.
Inflation continues to slow from its peak in September 2022 but remained high in April at 4.7% year-over-year according to the U.S. Bureau of Economic Analysis’ “core” price index for personal consumption expenditures excluding food and energy. The annual growth rate in the price index for services less housing has continued to hover between 4.3% and 5.2% since April 2021 and currently sits at 4.8% year-over-year
Recent developments in the U.S. housing market
Per the National Association of Realtors, existing home sales receded 3.4% in April to a seasonally adjusted annual rate of 4.28 million, while a separate joint release from the U.S. Census Bureau and U.S. Department of Housing and Urban Development surprised on the upside and reported that new home sales increased 4.1% in April. Through the first four months of the year, existing home sales have averaged a 4.3 million seasonally adjusted annual rate, representing a 14% decline from last year’s 5 million sales. Meanwhile, new homes have averaged a seasonally adjusted annual rate of 655,000 sales, representing a 2% increase from last year. The simultaneous decline of existing home sales and increase of new home sales has shifted the composition of the home sales market toward new home sales. Excluding the temporary spike due to the onset of the COVID-19 pandemic, of new home sales as of April 2023 comprise the largest percentage of total home sales since 2008 (Exhibit 2).
There is 2.9 months’ supply of existing homes at the current sales rate, and existing homes remained on the market for only 22 days in April according to NAR. New homes, on the other hand, have 7.6 months’ supply, according to the U.S. Census Bureau. Overall, the total number of single-family homes available for sale remains low at 1.3 million units, only 8.1% above its all-time low in February 2022. Furthermore, as the number of existing homes available for sale has dwindled while available new homes are relatively higher, the share of active for-sale inventory of new homes has reached near 30% (Exhibit 3).
The divergence between the new and existing home sales markets is suggestive of a substantial rate lock-in effect: homeowners with lower rates on their mortgages have a lower propensity to list their homes for sale and move due to the elevated rates of today, which pushes prospective buyers into the new-home market. This dynamic is consistent with the trends highlighted in Exhibits 2 and 3.
Though sales and supply are lagging, there are signs that the housing market is starting to rebound. The NAHB reported that builder sentiment increased to an index value of 50 in May, indicating that building conditions are balanced even in the face of tight credit conditions. The increase in sentiment is primarily due to current sales conditions and 6-month sales expectations, which both increased into positive sentiment territory in May. Starts and permits for single-family homes increased by 1.6% and 3.1%, respectively, over the month of April on a seasonally adjusted basis, according to the U.S. Census Bureau.
House prices continue to firm up in the short run. Per the FHFA’s purchase-only house price index, house prices increased 0.6% from February to March 2023. However, the national figures do not represent all regions equally as there is substantial regional heterogeneity, with monthly house price changes ranging from +1.5% in the East North Central Division to -1.3% in the Mountain Division.
Recent developments in the U.S. mortgage market
After spending two months in a narrow range between 6.28% and 6.43% from mid-March through mid-May, mortgage rates measured by the U.S. weekly average 30-year fixed mortgage rate in our Primary Mortgage Market Survey® have resumed their ascent in recent weeks. In the week of June 1, rates reached 6.79%, the highest reading since November of last year.
According to our estimates shown in Exhibit 4, mortgage originations in the first quarter of 2023 were just $344 billion, the lowest quarterly total since the second quarter of 2014. Higher mortgage rates are dampening mortgage application activity. Purchase applications were down 6.9% during the last week of May, while refinance applications dropped 11% after seasonal adjustment. Due to seasonality in the housing market, mortgage originations will likely increase in the second quarter, but full-year 2023 originations will almost certainly be below 2022 levels.
With a strong labor market and house prices resuming modest increases, overall mortgage performance is strong, especially when compared to other types of credit. According to data from Transunion the share of loans 60 days or more past due fell 0.01 percentage points from Q1 2021 to Q1 2023 for mortgages, while it increased by 0.36 percentage points for autos, 0.80 percentage points for Bankcards and 1.1 percentage points for unsecured personal loans over the same period. Per Transunion, subprime auto delinquency rates for the Q2 2022 vintage over nine months are up 3.16 percentage points relative to the Q2 2019 vintage, while delinquency rates for prime borrowers are only up 0.97 percentage points over the same period.
Overall credit performance remains solid for higher credit quality borrowers, but that is in an economy with unemployment rates below 4%. If the labor market outlook darkens, mortgage performance could weaken, and rising delinquency rates spread to higher credit quality borrowers.
The outlook
The macroeconomic outlook, and thus also the future of the housing and mortgage markets, remains uncertain. Macroeconomic indicators like GDI and inflation point to a slowing economy that could tip into recession if hit with a significant adverse shock. However, our baseline view does not include a recession, rather only a slowdown in growth and a modest uptick in unemployment as the most likely scenario. In establishing this baseline view, risks are weighted to the downside.
Macroeconomic indicators point to a slowing economy that could tip into recession if hit with a significant adverse shock. However, our baseline view predicts only a slowdown in growth and a modest uptick in unemployment.
General economy, rates, inflation
The U.S. economy, which primarily hinges on consumer spending, will slow down once consumers’ buffer of savings are depleted. But its impact on the economy will be limited unless it is accompanied by a substantial negative economic shock. In the past year and a half, the
economy has weathered adverse shocks (war, banking failures) and avoided slipping into recession. Part of the reason for the resilience of the economy is the resilience of the U.S. consumers, who still have substantial savings to draw on and can bolster the economy despite a decline in employment.
Under our baseline scenario, the unemployment rate gradually moves modestly higher, enough to slow the economy but not trigger a full-blown recession. In that scenario, we expect inflation to cool but remain above the Federal Reserve’s target of 2% and mortgage rates to move mostly sideways, most likely remaining above 6% through year-end.
Home sales
Our housing outlook, particularly for home sales, remains muted due to the challenges presented by higher mortgage rates and a slowing economy. However, not all the trends in the housing market are unfavorable. Despite the substantial affordability challenges, first-time homebuyers continue to come to the market and have contributed to an increase in homeownership rates as discussed in our spotlight section below.
Home prices
While home prices have been positive in most markets, it is still too early to separate the signal from the noise fully, and employment is likely to weaken, so we maintain a cautious outlook for prices. Our official corporate forecast calls for house prices to fall 2.9% over twelve months through Q1 of next year and an additional 1.3% over the subsequent twelve months.
Mortgage originations
The refinance market will remain muted this year, given the expected path for mortgage rates. On the home purchase side, we expect mortgage originations to stay flat this year. Purchase originations will start to strengthen later this year as home sales stabilize, and they will resume modest growth in 2024.
JUNE 2023 SPOTLIGHT: HOMEOWNERSHIP RATES
The below-median income homeownership rate is surging
At Freddie Mac, we strive to make home possible, and as part of our mission, we develop research and analysis that helps identify relevant housing trends. June is National Homeownership Month and accordingly, this month’s special topic looks at homeownership rates broken out by income level and the surprising trend that has emerged in recent years.
The Census Bureau’s Housing Vacancy Survey unexpectedly shows that the below-median family income homeownership rate has
sharply increased from 48% to 53% since 2016.
The homeownership rate measures the proportion of total occupied housing units that are owner-occupied (versus renter-occupied). The Census Bureau’s Housing Vacancy Survey shows an unexpected trend in the homeownership rate for households with a family income less than the median family income. Exhibit 5 (following page) shows that the below-median family income homeownership rate has sharply increased since 2016 from 48.0% to 53.4% as of the first quarter of 2023.
Conversely, the homeownership rate for owner-occupied households with a family income higher than the median family income has grown at a much softer pace than the below-median family income homeownership rate. Exhibit 6a shows that since the second quarter of 2016, the below-median family income homeownership rate has increased 5.4 percentage points while the above-median family income homeownership rate has only increased 0.8 percentage points.
Furthermore, the overall increase in the total homeownership rate since 2016 has been driven mainly by the strong growth in the below-median family income homeownership rate. Exhibit 6b shows that since the second quarter of 2016, the growth in the below-median family income homeownership rate accounted for at least 70% of the cumulative growth in the overall homeownership rate in each subsequent quarter. As of the first quarter of 2023, 87% of the 3.1 percentage point increase in the overall homeownership rate since 2016 can be attributed to the growth in the below-median family income homeownership rate.
The homeownership rate gap between above-median and below-median family income households has shrunk over the last couple of years and has generally been trending down over the past decade as the growth in the below-median family income homeownership rate continues to outpace the abovemedian family income homeownership rate growth. Exhibit 7 shows the gap steadily decreasing since after the Great Financial Crisis and more so in recent years. As of the first quarter of 2023, the gap stands at 25.2%, the smallest gap since the start of the series.
The strong growth in the below-median family income homeownership rate may seem unexpected given the strong house price growth since the pandemic and more recently, the jump in borrowing costs. Nonetheless, below-median family income households are overcoming constraints and finding ways to become homeowners even within a less affordable environment – an encouraging sign as we continue to celebrate National Homeownership Month.
Footnotes
1 Aruoba, S.B., Diebold, F.X., Nalewaik, J., Schorfheide, F. and Song, D., 2016. Improving GDP measurement: A measurement-error perspective. Journal of Econometrics, 191(2), pp.384-397.
2 Jordà, Ò., Singh, S. R., & Taylor, A. M. (2020). The long-run effects of monetary policy (No. w26666). National Bureau of Economic Research., and Meier, M. and Reinelt, T., 2022. Monetary policy, markup dispersion, and aggregate TFP. Review of Economics and Statistics, pp.1-45.