Uncommon Knowledge
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This has kept single-family permits from falling and kept construction workers employed to build and finish the backlog of single-family homes in the pipeline.
We obviously can’t say that the apartment marketplace and permits are back to recession lows.
So, for now, homebuilders can still keep construction workers employed in the single-family housing market as they slowly work through the backlog of homes.
From Census: New Home Sales: Sales of new single‐family houses in February 2024 were at a seasonally adjusted annual rate of 662,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development.
As we can see below, new home sales aren’t booming. We are still at the level seen in the 1990s, so no record-breaking demand is happening here like we saw in the run-up to 2005, which took new home sales up to 1.4 million. However, slow and steady wins the race.
For sale inventory and months’ supply: The seasonally‐adjusted estimate of new houses for sale at the end of February was 463,000. This represents a supply of 8.4 months at the current sales rate.
Here’s my model for understanding the builders:
This housing cycle is unique due to the historic backlog of homes the builders still have, so they will be mindful to ensure they can sell those homes once they’re completed units. If the original contract buyer can’t buy now, they must ensure they can sell that new home to a new buyer. As you can imagine with 8.4 months of supply, don’t expect the builders to be building single-family homes in a big fashion. They will go nice and slow because they’re not the March of Dimes; they’re here to make money.
One of the things I like to do is break down the monthly supply data into subcategories. People sometimes believe that the monthly supply of new homes means live, completed homes ready to buy, but that isn’t the case. In this report:
As shown below, we only have 85,000 completed homes ready for sale.
This report had some minor positive revisions to the previous month, so to keep things simple, as long as mortgage rates don’t head toward 8%, new home sales have the backdrop to grow sales if rates are in the 6% range because they can buy down rates to a sub-6% level to move homes. It gets much more expensive for them to do this at 8%.
Source: housingwire.com
Rather than easing back from the January level as expected, existing home sales shot significantly higher in February, The National Association of Realtors® (NAR) said pre-owned single-family houses, townhouses, condominiums, and cooperative apartments sold at a seasonally adjusted annual rate of 4.38 million units. This is an increase of 9.5 percent from the 4.0 million unit pace the previous month and the largest monthly increase since last February. Sales still trailed that month’s 4.53-million-unit rate by 3.3 percent.
Analysts polled by Econoday had a consensus estimate for sales of 3.92 million units while Trading Economics had projected the rate at 3.94 million.
Single-family home sales grew to a seasonally adjusted annual rate of 3.97 million in February, a 10.3 percent gain, but were down 2.7 percent year-over-year. The annual sales rate for condos and coops (410,000 units) was 2.5 percent higher than in January, but 8.9 percent below the February 2023 pace.
Despite the increase in sales, the number of homes available for sale also climbed, rising 5.9 percent from January and 10.3 percent from the previous February to 1,07 million units. This is estimated at a 2.9-month supply at the current rate of sales. Still, inventory remains well below the five-to-six-month supply considered a balanced market.
The median existing home price for all housing types in February was $384,500, an increase of 5.7 percent from $363,600 a year earlier. It was the eighth consecutive month of year-over-year price gains and was the highest price ever recorded for the month of February. The median price for a single-family home was $388,700, a 5.6 percent annual increase while condos appreciated by 6.7 percent to a median of $344,000.
First-time buyers were responsible for 26 percent of the month’s sales and individual investors or second-home buyers accounted for 21 percent. Thirty-three percent of sales were all-cash. Properties typically remained on the market for 38 days in February, up from 36 days in January and 34 days in February 2023.
Sales rose in three of the four major regions compared to January but remained below the pace a year earlier in all four. For the fourth consecutive month, the Northeast posted a sales rate of 480,000 units. This was 7.7 percent below the previous February’s number. The median price in the Northeast was $420,600, an increase of 11.5 percent from one year ago.
“Due to inventory constraints, the Northeast was the regional underperformer in February home sales but the best performer in home prices,” NAR chief economist Lawrence Yun said. “More supply is clearly needed to help stabilize home prices and get more Americans moving to their next residences.”
In the Midwest, existing home sales rose 8.4 percent to an annual rate of 1.03 million, a 3.7 percent deficit year-over-year. The median price moved higher by 6.8 percent to $277,600.
Existing home sales in the South jumped 9.8 percent from January to an annual rate of 2.02 million, down 2.9 percent from one year earlier. The median price in the South was $354,200, up 4.1 percent from last year.
The greatest increase was in the West with a surge of 16.4 percent compared to January. The annual rate of 850,000 units was 1.2 percent below sales the prior year. Prices also surged, rising 9.1 percent to $593,000.
National Association of Home Builders (NAHB) analyst Fan-Yu Kuo, writing in the Eye on Housing blog compared results of NAR’s Pending Home Sales Index (PHSI), a measure of signed purchase contracts thought to be a leading indicator of existing home sales, to recent completed transactions. Kuo said the PHSI fell from 78.1 to 74.3 in January. On a year-over-year basis, pending sales were 8.8 percent lower than a year ago per the NAR data.
Source: mortgagenewsdaily.com
Mike Fratantoni, the chief economist and senior vice president of research and industry technology at the Mortgage Bankers Association (MBA), addressed three major challenges in the housing market during testimony before the U.S. House of Representatives‘ Financial Services Subcommittee on Housing and Insurance.
The biggest challenge in today’s housing market is the lack of inventory, Fratantoni said in his written statement on Wednesday.
“While the demographic fundamentals of the market continue to support strong housing demand for the next several years, the market is millions of units short of that needed to support this demand,” he said.
The silver lining, however, is that builders have picked up their pace of construction. New homes now account for roughly one-third of homes on the market, which compares to a more typical historical share of 10%.
As a result, a large delivery of multifamily units is expected over the next few years, but the recent trend in elevated mortgage rates has exacerbated this supply shortfall, Fratantoni explained.
Compounding the lack of supply is the proverbial “lock-in“ effect that has disincentivized homeowners to sell their current properties, thereby giving up a low mortgage rate and taking on a new loan at a much higher rate.
“A homeowner that was able to refinance into a low-3% or high-2% mortgage rate is just much less likely to list their property,” Fratantoni told lawmakers. “It doesn’t mean they’re never going to list … but it’s a friction in the system, so it’s going to keep existing inventory much lower than it otherwise would be.
“That’s been a support to home prices, but for someone trying to get into the market, it’s really an obstacle.”
Fratantoni also expressed concern that the recent Basel III Endgame proposal would accelerate the trend of the mortgage market shifting away from depository institutions, particularly large banks, toward non-depositories and independent mortgage banks.
The Basel Endgame proposal — issued by the Federal Reserve, Federal Deposit Insurance Corp. (FDIC) and the Office of the Comptroller of the Currency (OCC) in July 2023 – boosted capital requirements for residential mortgage portfolios at large U.S. banks in comparison to international standards.
Under the draft proposal, 40% to 90% risk weights would be assigned for large banks that issue residential mortgages, depending on the loan-to-value ratio, which is 20 basis points above the international standard.
MBA’s comment letter highlighted the overly conservative risk weights on mortgages — particularly for low down payment loans favored by first-time homebuyers — and the lack of benefit for loans with mortgage insurance. It also mentioned the punitive treatment of mortgage servicing rights (MSRs) and the burdensome treatment of warehouse lending as being particularly negative for the mortgage market.
The Basel Endgame proposal would increase capital requirements on all three types of mortgage activities by banks — low down payment loans held on balance sheets, mortgage servicing and warehouse lending.
As a result, the Basel Endgame proposal “poses a significant risk to the stability of the housing finance market if it is not modified across all of these dimensions,” Frantantoni stated.
Addressing the increased cost of property insurance for both prospective homebuyers and current homeowners is a priority for the MBA.
“The lack of availability and cost of homeowners insurance … it’s not only impacting the ability of borrowers to qualify for a loan, but increasing payments for existing homeowners to such an extent really puts them on an unstable path, so it really is front and center for us right now,” Fratantoni told lawmakers.
The average cost to insure a $300,000 home surged by 12% in 2023, reaching $1,770 per year, according to an Insurify report.
Certain insurance carriers have also limited their participation in natural disaster-prone states like California and Florida, given the increases in risks and costs.
Over the past 18 months, seven of the 12 largest insurance companies by market share in California have either paused or restricted new policies in the state, highlighted by the departures of State Farm and Allstate in June 2023.
Due to these departures and price hikes, the California FAIR Plan, the state’s insurer of last resort, has seen enrollment double over the past few years.
“Although these increases in premiums and reductions in availability of insurance have been concentrated in certain markets at this point, the concerns regarding property insurance continue to build for our lender members in the residential, multifamily and commercial sectors — and for all their customers,” Fratantoni said.
Source: housingwire.com
Builder confidence rose for the fourth straight month and residential construction stats may now be trying to catch up. Both construction permits and housing starts rose in February compared to both January and February 2023 levels.
The U.S. Census Bureau and the Department of Housing and Urban Development (HUD) said new residential construction began on a seasonally adjusted pace of 1.521 million units last month. This is 10.7 percent higher than the 1.374 million units reported in January and 5.9 percent more than the level a year earlier.
Single-family starts rose 11.6 percent for the month to a rate of 1.129 million units and were up 35.2 percent year-over-year while multifamily starts increased by 8.5 percent. They retreated however by 35.9 percent on an annual basis.
On a non-seasonally adjusted basis, construction started on 108,100 units during the month, 79,200 of which were single-family houses. The January numbers were 97,400 and 69,700 respectively.
Permitting also increased, although not as dramatically. Authorizations were at a seasonally adjusted level of 1.518 million, 1.9 percent higher than the 1.489 million estimate the previous month. The year-over-year change was +2.4 percent.
Single-family permits were up 1.0 percent to 1.031 million, 29.5 percent higher than a year earlier. Multifamily permits increased 2.4 percent but lagged the prior February by 32.8 percent.
Permits issued during the month totaled 118,300, up from 114,800. Single-family permits increased from 75,900 to 79,300.
Analysts were on target with their forecasts. Those polled by Econoday had consensus estimate of 1.449 million for starts and 1.500 million for permits.
There were an estimated 124,100 residential units completed in February compared to 97,300 in January. Of those, a respective 81,000 and 61,000 were single-family units. On a seasonally adjusted basis, completions increased 19.7 percent from January and 9.6 percent for the year.
The National Association of Home Builders (NAHB) said its index measuring home builder perceptions of the new home market climbed back above the key level of 50 this month. The NAHB/Wells Fargo Housing Market Index rose 3 points to 51, the highest level since July 2023 and the first time it has surpassed the 50 mark since last July. NAHB economist Robert Dietz said builders are responding to the strong demand for housing and mortgage rates which are below the peak reached last fall.
The HMI survey asks builders for their perception of current single-family home sales, sales expectations for the next six months, and current traffic of prospective builders. The scores for each component form an index where any number over 50 indicates that more builders view conditions as good than poor.
All three indices posted gains in March. The HMI index charting current sales conditions increased 4 points to 56, the component measuring sales expectations in the next six months rose 2 points to 62 and the component gauging traffic of prospective buyers increased 2 points to 34.
Dietz also noted that the slightly lower rates are allowing builders to cut back on discounting to boost sales. In March, 24 percent of builders reported cutting home prices, down from 36 percent in December 2023 and the lowest share since July 2023. However, the average price reduction in March held steady at 6 percent for the ninth straight month. Meanwhile, the use of sales incentives is holding firm. Sixty percent of builders offered some form of incentive in March. That share has remained between 58 percent and 62 percent since last September.
Looking at the three-month moving averages for regional HMI scores, the Northeast increased 2 points to 59, the Midwest gained 5 points to 41, the South rose 4 points to 50 and the West registered a 5-point gain to 43.
The Census/HUD report estimates there were 1.666 million residential units under construction at the end of February, 683,000 of them single-family houses. In addition, builders have a backlog of 270,000 permits including 141,000 for single-family residences.
Starts in the Northeast region were down 10.3 percent from January but 16.2 percent higher than the previous February. Permits rose 36.2 percent from January and surged 79.6 percent compared to February 2023.
The Midwest saw gains of 16.4 percent from the prior month and 23.2 percent for the year. Permits increased by 3.8 and 14.9 percent.
Housing starts jumped 15.7 percent and 11.5 percent from the two earlier periods in the South. Permitting dipped by 1.3 percent from January and 5.1 percent for the year.
The West lost ground, with starts falling 7.9 percent and 10.8 percent for the month and the year respectively. Permits were also lower, by 6.8 and 11.2 percent.
Source: mortgagenewsdaily.com
From Census: Building Permits: Privately‐owned housing units authorized by building permits in February were at a seasonally adjusted annual rate of 1,518,000. This is 1.9 percent above the revised January rate of 1,489,000 and 2.4 percent above the February 2023 rate of 1,482,000.
When people say housing leads us in and out of a recession, it is a valid premise and that is why people carefully track housing permits. However, this housing cycle has been unique. Unfortunately, many people who have tracked this housing cycle are still stuck on 2008, believing that what happened during COVID-19 was rampant demand speculation that would lead to a massive supply of homes once home sales crashed. This would mean the builders couldn’t sell more new homes or have housing permits rise.
Housing permits, starts and new home sales were falling for a while, and in 2022, the data looked recessionary. However, new home sales were never near the 2005 peak, and the builders found a workable bottom in sales by paying down mortgage rates to boost demand. The first level of job loss recessionary data has been averted for now. Below is the chart of the building permits.
On the other hand, the apartment boom and bust has already happened. Permits are already back to the levels of the COVID-19 recession and have legs to move lower. Traditionally, when this data line gets this negative, a recession isn’t far off. But, as you can see in the chart below, there’s a big gap between the housing permit data for single-family and five units. Looking at this chart, the recession would only happen after single-family and 5-unit permits fall together, not when we have a gap like we see today.
From Census: Housing completions: Privately‐owned housing completions in February were at a seasonally adjusted annual rate of 1,729,000.
As we can see in the chart below, we had a solid month of housing completions. This was driven by 5-unit completions, which have been in the works for a while now. Also, this month’s report show a weather impact as progress in building was held up due to bad weather. However, the good news is that more supply of rental units will mean the fight against rent inflation will be positive as more supply is the best way to deal with inflation. In time, that is also good news for mortgage rates.
Housing Starts: Privately‐owned housing starts in February were at a seasonally adjusted annual rate of 1,521,000. This is 10.7 percent (±14.2 percent)* above the revised January estimate of 1,374,000 and is 5.9 percent (±10.0 percent)* above the February 2023 rate of 1,436,000.
Housing starts data beat to the upside, but the real story is that the marketplace has diverged into two different directions. The apartment boom is over and permits are heading below the COVID-19 recession, but as long as the builders can keep rates low enough to sell more new homes, single-family permits and starts can slowly move forward.
If we lose the single-family marketplace, expect the chart below to look like it always does before a recession — meaning residential construction workers lose their jobs. For now, the apartment construction workers are at the most risk once they finish the backlog of apartments under construction.
Overall, the housing starts beat to the upside. Still, the report’s internals show a marketplace with early recessionary data lines, which traditionally mean mortgage rates should go lower soon. If housing leads us into a recession in the near future, that means mortgage rates have stayed too high for too long and restrictive policy by the Fed created a recession as we have seen in previous economic cycles.
The builders have been paying down rates to keep construction workers employed, but if rates go higher, it will get more and more challenging to do this because not all builders have the capacity to buy down rates. Last year, we saw what 8% mortgage rates did to new home sales; they dropped before rates fell. So, this is something to keep track of, especially with a critical Federal Reserve meeting this week.
Source: housingwire.com
Amid a housing shortage and an affordability crisis, US homebuilding heated up in February as builders anticipate demand for new homes to stay strong.
One sure way to improve affordability is to increase the availability of apartments to rent and homes to buy. In areas of the country where there has been robust homebuilding, rents and home price increases have been more moderate.
The pace of new housing starts soared by 10.7% in February from the month before, after slumping in January, according to data released Thursday by the Census Bureau and the Department of Housing and Urban Development.
Starts rose to a seasonally adjusted annual rate of 1.521 million units last month, beating analysts’ estimates of 1.425 million. The pace rebounded from January’s revised pace of 1.374 million and was 5.9% above the 1.436 million pace a year ago.
Meanwhile, the pace of new building permits was up 1.9% from January, which was up 2.4% from a year ago.
While the number of existing homes on the market remains historically low, new construction has provided a critical alternative for homebuyers.
Mortgage applications for a newly constructed home were up a whopping 15.7% in February from a year ago, according to the Mortgage Bankers Association; and up by 1% from January. The average loan size jumped to its highest level since last March at almost $406,000, but it was still below the record high of more than $436,000 in April 2022.
“It is possible that we could see more wiggle room on pricing in the coming months, as the inventory of existing homes begins to expand,” said Lisa Sturtevant, chief economist at Bright Multiple Listing Service, in a statement.
Prospective homebuyers who are looking at new construction are still finding some builders offering concessions, upgrades, or favorable financing terms, she said.
But, according to the NAHB, fewer builders are offering price cuts.
The much lower mortgage rates that many homebuyers expected have yet to materialize, but builders want to be ready for when that does happen.
Mortgage rates have come down from their highest levels of last year — 7.79% in October — and are now about a full percentage point below that, at 6.74%.
“Lower mortgage rates are likely to bring buyers to the market in larger numbers, and builders are ramping up supply to meet this demand,” said Kelly Mangold of RCLCO Real Estate Consulting, in a statement.
While existing home inventory has ticked up lately, as is typical this time of year, there is still a historically low number of homes on the market as owners see the gap between their ultra-low rate and prevailing rates as still too wide.
That creates an opportunity for homebuilders who can provide inventory.
“Homebuilders continue to be bullish about the spring market as homeowners are still reluctant to list their homes for sale and new homes account for an outsized share of the active inventory,” said Sturtevant.
Homebuilder confidence improved this month even as mortgage rates climbed, according to a survey from the National Association of Home Builders released Monday.
The lack of existing inventory that continues to push buyers toward new home construction led homebuilder sentiment index to the highest level since July and marked the fourth consecutive monthly gain for the index.
Housing affordability amid high inflation and elevated interest rates remains a hot-button issue for the White House as well as the Federal Reserve.
President Joe Biden is set to address the housing shortage Tuesday in a speech from Las Vegas, where the cost of rent has increased 30% from before the pandemic and the cost to buy a home has risen by over 40% since then.
Biden is expected to call on Congress to pass legislation that he says could result in the building and renovation of more than 2 million homes to close the housing supply gap and lower housing costs.
Housing experts agree there are not enough homes available to rent or own compared to the demand. But the size of that gap ranges from a shortfall of 1.5 million units (according to National Association of Home Builders) to 5.5 million units (according to the National Association of Realtors) or as many as 7 million (according to the National Low Income Housing Coalition and Realtor.com), depending on who is calculating it and what assumptions about housing are being made.
Source: cnn.com
My work on housing moves around the 10-year yield and the economics that move that. The growth rate of inflation has fallen a lot on the year-over-year data, but mortgage rates haven’t gone down, which isn’t surprising to me as my mantra has been: “Labor over Inflation.”
For 2024, the 10-year yield running between 3.80%-4.25% looks perfectly normal to me as long as the economic data is firm and the Fed hasn’t pivoted. I can’t see the 10-year yield below 3.37% unless the labor market breaks — meaning jobless claims over 323,000 on the four-week moving average. That means I can’t see mortgage rates going below 6%, especially with the spreads being bad, until the labor market or the economy gets weaker.
However, now we are at the same spot as last year, near the critical 4.34% level and we have the Federal Reserve meeting coming up. This is a big week, as you can see in the chart below.
With mortgage rates above 7% again, we will have to see what the Fed says at this meeting because, in the past few meetings, they have made it clear that policy is restrained and that they don’t want it to get too restrictive. This is what happened last year when the 10-year yield headed to 5% and we had 8% mortgage rates. However, there is a risk of the Fed sounding too hawkish again which would send the 10-year yield higher.
As mortgage rates have been falling recently, we saw back-to-back weeks of growth in the purchase application data, which aligns with what we saw last year. Remember, we are working from extremely depressed levels in this data line, so the bar is so low that it doesn’t take much to move the needle.
Since November 2023, we have had 10 positive and five negative purchase application prints after making holiday adjustments. Year to date, we have had four positive prints versus five negative prints. Clearly, if mortgage rates can head toward 6% and hold we will get rising demand, but I believe the Federal Reserve wouldn’t be able to sleep at night if more people were buying homes.
The one positive story for me in housing this year is that inventory is growing year over year for both active inventory and new listing data. I know it’s not a lot, but growth is growth. The one benefit of higher rates is that inventory can grow in the post-2010 qualified mortgage world as long as higher rates create softness in demand. It hasn’t been a lot of growth historically, but growth is growth.
Last year, the seasonal inventory bottom happened on April 14, which was the the longest time to find a seasonal bottom ever. This means we will show more than normal inventory growth until we get past tax day 2024.
Here is a look at the inventory last week:
New listings are growing yearly, which is another plus for housing. Last year, II picked up on the trend that new listing data was creating a historical bottom as the data line wasn’t heading lower with higher rates. The growth is a tad lighter than what I was hoping for. But as someone who didn’t buy the mortgage rate lockdown premise that inventory can’t grow with higher rates, this year is a good test case.
Here’s the weekly new listing data for last week over several previous years:
For some historical context, new listing data this week in 2010 was 306,020.
Every year, one-third of all homes take a price cut before selling — this is regular housing activity and this data line is very seasonal. The price-cut percentage can grow when mortgage rates move higher and demand gets hit. When rates fall, they go lower than an average year.
Inventory is higher than last year, and we might have found the bottom already, so as the year progresses, the number of homes taking a price cut should increase. The goal is to see how the mortgage rate variable plays into this data line. This is why this week’s Fed meeting is key, to see if the 10-year yield can break higher, which should increase the price-cut data.
Here’s the percentage of homes that took a price cut before selling last week and how that compares to the same week in previous years:
The Federal Reserve’s language and the dot plot are the two things to watch this week. The dot plot should still show many Fed members having two to three rate cuts in play for 2024, with some going the opposite way from that group. We also will have tons of housing data coming out this week, including the builders’ confidence, housing starts, existing home sales, and Zillow home price data. However, the key is the Fed, Fed and the Fed!
Source: housingwire.com
President Joe Biden has proposed an annual tax credit that would give Americans $400 a month for the next two years to put towards their mortgages.
Addressing the affordability crisis in the housing market in his State of the Union address on Thursday, Biden said: “I know the cost of housing is so important to you. Inflation keeps coming down, and mortgage rates will come down as well.
“But I’m not waiting. I want to provide an annual tax credit that will give Americans $400 a month for the next two years as mortgage rates come down, to put towards their mortgage when they buy their first home, or trade up for a little more space.”
Home prices skyrocketed during the pandemic, driven by relatively low mortgage rates, high demand and low inventory. At their peak, the median listed price for a home in the U.S. reached $465,000 in June 2022, according to data from the Federal Reserve Bank of St. Louis (FRED).
While the housing market experienced a price correction between late summer 2022 and spring 2023, prices remain historically high, propped up by lingering low supply. In June 2023, the median listed price for a home in the U.S. was $448,000. As of January 2024, this was $409,500, according to data from FRED.
While home prices have stayed high for the past three years, a rise in mortgage rates driven by the Federal Reserve’s aggressive hike rate campaign last year has led to many aspiring homebuyers being completely squeezed out of the market. In December last year, the reserve said that it would have stopped rising rates, but mortgages are yet to significantly come down.
High mortgage rates, together with the historic shortage of homes in the U.S.—due to the fact that the country hasn’t built enough homes to meet demand since the housing crash of 2008—have contributed to the current affordability crisis.
In late 2023, J.P. Morgan said that, based on then-current trends, housing affordability could be restored in 3.5 years. Newsweek contacted J.P. Morgan for comment by email on Friday morning.
Biden is now calling on Congress to provide a one-year tax credit of up to $10,000 to middle-class families who sell their starter home—a home below the median home price of the area where it is located—to another owner or occupant. The White House said that this proposal could help nearly 3 million American families.
On Friday, Biden’s announcement on the tax credit was met with a standing ovation and roaring applause by Democratic lawmakers, while about half of the House stayed seated.
The president also mentioned other measures to address the housing affordability crisis in the U.S. These included down-payment assistance for first-generation homeowners, tax credit to build more housing, and lowering costs by building and preserving millions of homes.
“My administration is also eliminating title insurance on federally backed mortgages,” Biden told lawmakers on Friday.
“When you refinance your home, you can save $1,000 or more as a consequence. We’re cracking down on big landlords who break antitrust laws by price-fixing and driving up rents. We’ve cut red tape, so builders can get federal financing,” the president said among the cheering of some lawmakers.
Update, 3/8/24, 8 a.m. ET: The headline on this article was updated.
Newsweek is committed to challenging conventional wisdom and finding connections in the search for common ground.
Newsweek is committed to challenging conventional wisdom and finding connections in the search for common ground.
Source: newsweek.com
Lately, mortgage rates have surged higher, climbing from as low as 2% to over 8% in some cases.
Despite this, home builders have been enjoying healthy sales of newly-built homes.
And somewhat incredibly, they haven’t had to lower their prices in many markets either.
The question is how can they continue to charge full price if financing a home has gotten so much more expensive?
Well, there are probably several reasons why, which I will outline below.
The first thing working in the home builders’ favor is a lack of competition. Typically, they have to contend with existing home sellers.
A healthy housing market is dominated by existing home sales, not new home sales.
If things weren’t so out of whack, we’d be seeing a lot of existing homeowners listing their properties.
Instead, sales of newly-built homes have taken off thanks to a dearth of existing supply.
In short, many of those who already own homes aren’t selling, either because they can’t afford to move. Or because they don’t want to lose their low mortgage rate in the process.
This is known as the mortgage rate lock-in effect, which some dispute, but logically makes a lot of sense.
At the same time, home building slowed after the early 2000s housing crisis, leading to a supply shortfall many years later.
Simply put, there aren’t enough homes on the market, so prices haven’t fallen, despite much higher mortgage rates.
There’s also this notion that home prices and mortgage rates have an inverse relationship.
In that if one goes up, the other must surely come down. Problem is this isn’t necessarily true.
When mortgage rates rose from record lows to over 8% in less than two years, many expected home prices to plummet.
But instead, both increased. This is due to that lack of supply, and also a sign of strength in the economy.
Sure, home buying became more expensive for those who need a mortgage. But prices didn’t just drop because rates increased.
History shows that mortgage rates and home prices don’t have a strong relationship one way or the other.
Things like supply, the wider economy, and inflation are a lot more telling.
For the record, home prices and mortgage rates can fall together too!
So we know demand is keeping prices mostly afloat. But even still, affordability has really taken a hit thanks to those high rates.
You’d think the home builders would offer price cuts to offset the increased cost of financing a home purchase.
Well, they could. But one issue with that is it could make it harder for homes to appraise at value.
One big piece of the mortgage approval process is the collateral (the property) coming in at value, often designated as the sales price.
If the appraisal comes in low, it could require the borrower to come in with a larger down payment to make the mortgage math work.
Lower prices would also ostensibly lead to price cuts on subsequent homes in the community.
After all, if you lower the price of one home, it would then be used as a comparable sale for the next sale.
This could have the unintended consequence of pushing down home prices throughout the builder’s development.
For example, if a home is listed for $350,000, but a price cut puts it at $300,000, the other homes in the neighborhood might be dragged down with it.
That brings us to an alternative.
Instead of lowering prices, home builders seem more interested in offering incentives like temporary rate buydowns.
Not only does this allow them to avoid a price cut, it also creates a more affordable payment for the home buyer.
Let’s look at an example to illustrate.
Home price: $350,000 (no price cut)
Down payment: 20%
Loan amount: $280,000
Buydown offer: 3/2/1 starting at 3.99%
Year one payment: $1,335.15
Year two payment: $1,501.39
Year three payment: $1,676.94
Year 4-30 payment: $1,860.97
Now it’s possible that home builders could lower the price of a property to entice the buyer, but it might not provide much payment relief.
Conversely, they could hold firm on price and offer a rate buydown instead and actually reduce payments significantly.
With a 3/2/1 buydown in place, a builder could offer a buyer an interest rate of 3.99% in year one, 4.99% in year two, 5.99% in year three, and 6.99% for the remainder of the loan term.
This would result in a monthly principal and interest payment of $1,335.15 in year one, $1,501.39 in year two, $1,676.94 in year three, and finally $1,860.97 for the remaining years.
This assumes a 20% down payment, which allows the home buyer to avoid private mortgage insurance and snag a lower mortgage rate.
If they just gave the borrower a price cut of say $25,000 and no mortgage rate relief, the payment would be a lot higher.
At 20% down, the loan amount would be $260,000 and the monthly payment $1,728.04 at 6.99%.
After three years, the buyer with the higher sales price would have a slightly steeper monthly payment. But only by about $130.
And at some point during those preceding 36 months, the buyer with the buydown might have the opportunity to refinance the mortgage to a lower rate.
It’s not a guarantee, but it’s a possibility. In the meantime, they’d have lower monthly payments, which could make the home purchase more palatable.
Price Cut Payment |
Post-Buydown Payment |
|
Purchase Price | $325,000 | $350,000 |
Loan Amount | $260,000 | $280,000 |
Interest Rate | 6.99% | 6.99% |
Monthly Payment | $1,728.04 | $1,860.97 |
Difference | $132.93 |
At the end of the day, the easiest way to lower monthly payments is via a reduced interest rate.
A slightly lower sales price simply doesn’t result in the savings most home buyers are looking for.
Using our example from above, the $25,000 price cut only lowers the buyer’s payment by about $130.
Sure, it’s something, but it might not be enough to move the needle on a big purchase.
You could take the lower price and bank on mortgage rates moving lower. But you’d still be stuck with a high payment in the meantime.
And apparently home buyers focus more on monthly payment than they do the sales price.
This explains why home builders aren’t lowering prices, but instead are offering mortgage rate incentives instead.
Aside from temporary buydowns, they’re also offering permanent mortgage rate buydowns and alternative products like adjustable-rate mortgages.
But again, these are all squarely aimed at the monthly payment, not the sales price.
So if you’re shopping for a new home today, don’t be surprised if the builder is hesitant to offer a price cut.
If they do offer an open-ended incentive that can be used toward the sales price or interest rate (or closing costs), take the time to consider the best use of the funds.
Those who think rates will be lower in the near future could go with the lower sales price and hope to refinance. Just be sure you can absorb the higher payment in the meantime.
Read more: Should I use the home builder’s lender?
Source: thetruthaboutmortgage.com
Moderation in mortgage rates led to a pickup in demand for residential real estate, but limited inventories across the country hindered actual home sales, the Federal Reserve reported in its Beige Book survey of regional business contacts that was published Wednesday.
Several Fed districts reported that a dearth of for-sale inventory contributed to faster home price growth since January. The spring homebuying season, which got underway a bit earlier than usual, was off to a good start in districts like New York and Dallas.
“Should mortgage rates fall, demand for residential real estate would increase, encouraging buyers who had been waiting on the sideline to move forward with home purchases,” according to the Beige Book.
The outlook for future economic growth remained generally positive as economists, market experts and business organization leaders interviewed for the report noted expectations for stronger demand and less restrictive financial conditions over the next six to 12 months.
The Beige Book, which was compiled by the Federal Reserve Bank of San Francisco using information gathered on or before Feb. 26, does not reflect the most recent rise in mortgage rates, which have surpassed 7% on HousingWire’s Mortgage Rates Center.
The Beige Book is published two weeks before each meeting of the policy-setting Federal Open Market Committee. The FOMC is expected to leave its benchmark interest rate unchanged when policymakers gather on March 19-20. The benchmark rate was last changed in July 2023, when it was raised to a range of 5.25% to 5.5%.
Federal Reserve Chair Jerome Powell reiterated Wednesday that policymakers still need to gain “greater confidence” that the battle against inflation is conquered before cutting interest rates.
“We believe that our policy rate is likely at its peak for this tightening cycle,” Powell said during testimony before the House Financial Services Committee. “If the economy evolves broadly as expected, it will likely be appropriate to begin dialing back policy restraint at some point this year.”
Following are excerpts of statements on housing conditions from the Federal Reserve districts, drawn from the newly released Beige Book.
***
Boston: Residential Realtors expressed growing optimism as both property listings and pending home sales increased. Contacts cited modest declines in mortgage rates since last fall as a likely reason for buyers’ increased willingness to enter the market.
Although inventory levels remained low, listings increased by modest to significant margins around the First District in recent months, lending increased optimism for sales moving forward. Still, contacts emphasized that the number of units for sale stayed far short of what they considered a balanced market, and that a dearth of inventories had contributed to faster house price growth from 2022 to 2023.
New York: Housing markets strengthened as the spring selling season got underway a bit earlier than normal. While inventory generally remained exceptionally low, inventory in New York City has begun to normalize. Many buyers who were waiting for a reprieve in mortgage rates have started to return with the intention of refinancing later. Though mortgage rate lock-in continues to limit new listings, particularly in the New York City suburbs, listings have increased in upstate New York as people have continued to leave the area for warmer climates.
Still, with such limited inventory, home prices have continued to press higher. Bidding wars were prevalent in the New York City suburbs but have been more limited in upstate New York.
Philadelphia: The inventory of for-sale properties remained extremely low as it has since the pandemic began. But real estate agents noted that higher interest rates have severely limited new listings over the past year and were responsible for the significantly lower level of closings.
New-home builders continued to report steady sales at relatively strong levels, in part because of the lack of existing for-sale homes. Most expect their pipeline of contracts to keep construction busy through the year.
Cleveland: Residential construction contacts reported that demand increased as mortgage rates declined. But real estate agents indicated existing-home sales changed little because inventory remained low.
Looking ahead, homebuilders and real estate contacts anticipated that demand would increase should mortgage rates fall, encouraging some “customers [who had been] waiting on the sideline” to move forward with home purchases.
Richmond: Respondents noted an increase in listings and buyer activity, but the elevated mortgage rate made buyers more tentative on making home purchase decisions. Sales prices have flattened, but there were still multiple offers on many homes.
Days on market increased slightly but remained below historic averages. The home construction market was constrained as it was difficult to find land and to receive permitting for new developments. Residential construction costs started to moderate this period.
Atlanta: As mortgage rates retreated from cyclical highs, homeownership affordability improved throughout the district. But home sales in most major markets ended the year well below seasonal norms and remained significantly behind pre-pandemic levels. Potential buyers locked into historically low mortgage rates remained reluctant to move, and migration into the district moderated through 2023, resulting in diminished housing demand.
Existing-home inventory levels were also suppressed by the “lock-in effect,” resulting in flat to moderate price growth in many markets. Demand for newly constructed homes was boosted by the lack of existing homes and builders.
Chicago: Residential real estate activity was down moderately, although prices were steady overall. High interest rates and a low supply of existing homes for sale continued to hold back activity.
St. Louis: Residential real estate sales have slowed since our previous report. Contacts in Arkansas and Tennessee reported that the low end of the market continues to be strong, while contacts in Missouri and Southern Indiana reported higher-end homes selling better. Rental rates for residential real estate have remained unchanged since our previous report.
Minneapolis: Single-family development remained soft, with modest but spotty increases in some district markets compared with a year earlier. A Minnesota contact said that “consumers quite abruptly stopped spending discretionary income on larger home improvements.”
Dallas: Home sales rose during the reporting period, and contacts noted that the spring selling season was generally off to a good start. Cancellation rates were down, buyer incentives were less prevalent, and builders said they were raising prices slightly in some markets.
Outlooks were positive, although contacts cited economic and political uncertainty, diminished affordability and tight lending.
San Francisco: Real estate activity rose slightly overall. Residential construction strengthened. Demand for single-family homes picked up slightly, as mortgage rates, though still elevated, moderated a bit in recent weeks. To attract reluctant homebuyers, some homebuilders began offering variable-rate mortgages at below-market interest rates, which revert to market pricing after a year, at which point buyers are reportedly expecting rates to be lower.
Source: housingwire.com