Builders have addressed their inability to keep up with demand for new homes, saying there simply aren’t enough workers to build them.
Building firms point out there are around 250,000 unfilled construction jobs in the U.S. today, including positions for home framers, electricians, masons, carpenters and others. This shortage of workers means that new home construction is being held back.
“It takes me twice as long now to do an estimate as it used to,” Jason Scott, owner of North Star Premier Custom Homes in Westlake, Ohio, told realtor.com. He reckons that he now has to wait an average of 8 to 10 weeks in order to procure workers for his projects, whereas before it would take just a single day. Unfortunately Scott is not alone, as many builders face similar recruitment problems, the National Association of Home Builders said.
“We’ve got rising housing demand at the same time that the residential construction industry lacks workers,” said Robert Dietz, the NAHB’s chief economist.
Dietz said that builders expect to complete around 900,000 new single-family homes this year, which is far below the 1.2 million needed to keep pace with buyer demand.
Builders are being blamed for not building more homes amid an intense shortage of housing inventory across the nation. Economists say that the lack of new homes is also to blame for rising home prices across the country.
But the builders say the lack of workers means higher costs, with subcontractors taking advantage of the situation to increase their prices by around 10 percent this year alone, Scott said. He told realtor.com that he’s now paying double for framing workers compared to what they were receiving a decade ago.
“I know builders who haven’t factored these [workers’ pay] increases in, and they’re watching $10,000 to $15,000 come off their bottom line,” Scott said.
The construction industry saw thousands of workers leave during the last housing crisis and many of those have not returned. Things have been complicated further by a decline in vocational education courses, which means fewer young people are pursuing a career in trades.
Some organizations are stepping in to train more workers for construction. The Home Builders Association in Colorado Springs, Colo., for example, has partnered with a local school district to start a vocational program, Careers in Construction, in six schools. Home Depot recently pledged $50 million to the Home Builders Institute, an educational trade group, to support a Pre-Apprenticeship Certificate Training program in schools and on military bases.
“The worker shortage is severe,” Dietz said. “The industry is going to have to recruit the next generation of construction workers—or we’ll continue to underbuild houses, there won’t be enough houses, and home prices will continue to rise faster than incomes.”
Mike Wheatley is the senior editor at Realty Biz News. Got a real estate related news article you wish to share, contact Mike at [email protected].
Unemployment rates are at their lowest level since 2000, while the economy is by all accounts running strong. But although these conditions might normally seem ideal for the real estate market, sales remain stagnant, with existing-home sales actually down by 1 percent year over year.
One of the main problems is low inventory, which means less competition for sellers and much faster sales than is normal. The average U.S. home will likely find a buyer under contract within just 26 days, according to a recent Realtor.com survey. That’s much faster than historical averages, which are usually around the 50 to 60 day mark.
“We’re in a bizarre world of a heated housing market where home sales are not rising,” National Association of Realtor’s Chief Economist Lawrence Yun wrote in his latest column at Forbes.com.
Yun said the lack of inventory is proving to be a challenge for real estate markets across the U.S., and said there was a desperate need for new homes.
“Whether it is the construction of affordable homes to meet first-time buyer needs, large-size homes to permit some existing homeowners to trade up, or developing an age-restricted retirement community, empty new homes will satisfy the rising housing demand,” Yun said.
He warned that just trying to get existing homeowners to sell simply won’t cut it, as many are not prepared to play what he called a “game of musical chairs” where they could find themselves without a place to sit once a sale has been made.
Yun said that many homeowners who might otherwise want to sell are refraining from doing so because they believe they’ll struggle to find a suitable new home once they’ve sold. He noted that the median length of time people stay in their home has grown to 10 years – previously, it averaged between six and eight years.
As such, Yun argues that new homebuilding is the only way to put the housing market back on track. He adds that it won’t just benefit the real estate industry, but also create new jobs, boost local economies and increase tax revenue. New construction will also help to make home prices moderate and boost the homeownership rate, Yun said.
Mike Wheatley is the senior editor at Realty Biz News. Got a real estate related news article you wish to share, contact Mike at [email protected].
Average U.S. mortgage rates for a 30-year fixed mortgage rose to 2.99% this week from 2.96% last week, Freddie Mac said in a report on Thursday.
The average 15-year rate rose to 2.54% from 2.46%, according to the mortgage financier.
The upward moves come after the Federal Housing Finance Agency approved a new “adverse market” fee for refinancings to compensate Fannie Mae and Freddie Mac for the additional risk posed by the economic crisis caused by the COVID-19 pandemic.
“The fact that Fannie Mae and Freddie Mac are assessing a 50 basis point adverse market fee on refinancings is not something that will reassure lenders, whether for refis or purchase loans,” said Keith Gumbinger of HSH.com. “That was a beacon telling the market `There’s a lot of risk out here,’ and that’s going to put upward pressure on rates.”
The course of the economic recovery is dependent on whether Congress will address the COVID-19 pandemic, Moody’s Investors Service said in a report on Thursday.
Speaker Nancy Pelosi (D-CA) called the House of Representatives back from its traditional August vacation this week, but the Senate remains on summer break and currently isn’t scheduled to be back in session until Sept. 7.
The Moody’s report panned the four directives signed by President Donald Trump on Aug. 8 that he said would address the lapse in beefed-up unemployment benefits and other issues.
“The recent executive actions meant to provide relief to vulnerable households are subject to implementation risk and too limited in scope to provide significant support to the economy,” the Moody’s report said.
Even with the increase this week, mortgage rates remain low and will support the economy with home purchases and renovations, said Sam Khater, Freddie Mac’s chief economist.
“Purchase housing demand continues to accelerate, ultimately providing support to an economy that otherwise has stagnated,” Khater said. “The surge in sales led to a rapid increase in the demand for remodeling and home furnishings as consumers look to renovate while adjusting to home life during COVID.”
New Zillow research finds the share of first-time buyers has hit 50%, the highest level in years
SEATTLE, Aug. 23, 2023 /PRNewswire/ — Half of all home buyers are purchasing their first home, the highest share that Zillow has ever recorded. Zillow’s 2023 Consumer Housing Trends Report finds that first-time buyers now make up 50% of all home buyers, up from 45% last year and a meaningful jump from 37% in 2021. The share of first-time buyers likely hasn’t been this high since around 2010, when there was a first-time home buyer tax credit.
First-time buyers are making gains relative to repeat buyers. Zillow research finds a vast majority of homeowners with mortgages have locked in a rate below 5%, and are almost half as likely to consider moving. It’s true that first-time buyers make up a larger piece of a smaller pie, as home sales and inventory shrink. However, this significant rise in the share of first-time buyers helps explain what’s driving demand and keeping upward pressure on prices in a market with mortgage rates surpassing 7%.
“High mortgage rates and a shortage of inventory is keeping would-be repeat buyers in their current homes,” said Zillow senior population scientist Manny Garcia. “A greater relative share of first-time buyers is filling the gap, and they’re competing against each other for the limited number of affordable starter homes on the market.”
Affordability is the greatest hurdle for first-time home buyers. It now takes nearly 12 years for a typical first-time buyer to save up for a down payment, compared to nine years prior to the pandemic. Meanwhile, the typical monthly home payment has more than doubled in that time. Yet the growing share of first-time buyers suggests many are getting creative to make homeownership a reality.
Zillow’s report finds that most first-time buyers are tapping at least two sources to finance their down payment (60%), most commonly their savings and gifts from family or friends. Down payment assistance can help, and available programs are included on every for-sale listing on Zillow.
There are other tools helping first-time buyers anticipate and manage monthly costs. A new app filter on Zillow allows shoppers to search for homes by monthly mortgage cost, instead of by list price. In addition, a growing share of buyers are paying an upfront fee to reduce the interest rate on their mortgage and in turn, lower their monthly payment. Research from Zillow Home Loans finds nearly 45% of conventional primary home borrowers bought points to ease monthly costs, compared to 30% who did the same in 2021.
Nearly half of first-time home buyers are millennials (49%), a massive generation of adults ages 29–43 who are fueling fundamental housing demand as they hit their prime home-buying years. Gen Z adults between 18 and 28 years old are hot on their heels, making up more than one-quarter of all first-time buyers (27%).
These younger buyers are debunking the “lazy millennial” myth by working harder during the home-buying process. Zillow’s report finds that first-time buyers are more likely to contact at least three real estate agents and three mortgage lenders, compared to repeat buyers. They’re also more likely to make at least two offers on homes, and are more likely to report being denied a mortgage at least once before they’re approved for a loan. First-time buyers are seeing their persistence pay off for a piece of the American Dream, and many still believe the opportunity to build equity outweighs today’s higher costs of entry.
About Zillow Group:
Zillow Group, Inc. (NASDAQ: Z and ZG) is reimagining real estate to make home a reality for more and more people. As the most visited real estate website in the United States, Zillow and its affiliates help people find and get the home they want by connecting them with digital solutions, great partners, and easier buying, selling, financing and renting experiences.
Zillow Group’s affiliates, subsidiaries and brands include Zillow®; Zillow Premier Agent®; Zillow Home Loans℠; Trulia®; Out East®; StreetEasy®; HotPads®; and ShowingTime+℠, which includes ShowingTime®, Bridge Interactive®, and dotloop®.
According to the NAR, total existing-home sales — completed transactions that include single-family homes, townhomes, condominiums, and co-ops — waned 2.2% from June to a seasonally adjusted annual rate of 4.07 million in July. Year-over-year, sales slumped 16.6% (down from 4.88 million in July 2022). “Two factors are driving current sales activity – inventory availability and mortgage rates,” said NAR Chief Economist Lawrence Yun. “Unfortunately, both have been unfavorable to buyers.” As we can see in the chart below, since 2010, whenever rates rise, demand falls. When rates fall, demand picks up again. What happened with existing home sales in February was that we had three months of positive purchase application data as mortgage rates fell from 7.37% to 5.99%. We had a massive one-month print from 4 million to 4.5 million. After that, little has been happening with existing home sales — mortgage rates and home prices are too high to push growth.
No movement in purchase apps
Purchase application data year to date has 16 negative prints versus 14 positive prints and one flat print. So, there is little movement in either direction. If I swing back to November 9, 2022, then we have 21 positive prints. Hopefully, this shows you the power of forward-looking purchase apps data, which aren’t collapsing currently, but they’re not growing either. We are stuck at deficient levels but heading lower as mortgage rates have risen.
Now let’s look at the buyer profile and the days on the market. Days on the market are growing year over year, positive for housing, but still too low for my taste. You must understand that days on the market are seasonal, so we will be entering the timeline when the days on the market will grow. The key is to focus on the year-over-year data rather than the seasonal fall and rise.
@NAR_Research
First-time buyers were responsible for 30% of sales in July; Individual investors purchased 16% of homes; All-cash sales accounted for 26% of transactions; Distressed sales represented 1% of sales; Properties typically remained on the market for 20 days. #NAREHS
“Total housing inventory registered at the end of July was 1.11 million units, up 3.7% from June but down 14.6% from one year ago (1.3 million). Unsold inventory sits at a 3.3-month supply at the current sales pace, up from 3.1 months in June and 3.2 months in July 2022,” according to NAR.
Historical inventory levels
Even with the biggest one-year sales crash ever, NAR-reported inventory levels are still near all-time lows. If most home sellers are buyers, then when they list their homes, they know they’re qualified to buy a home at current rates. Hopefully, this explains why we still have low active listings data. Traditionally, we have between 2-2.5 million active listings, currently at 1.11 million.
NAR Inventory data going back to 1982.
Today’s existing home sales data shows that we were slowing down again — even before the recent move in higher mortgage rates. However, home sales aren’t crashing like in 2022, and inventory has been negative year over year for some time now. This is a much different housing cycle than the ones we have seen in previous decades.
The 30-year mortgage and low total housing cost has made the American home not only the best hedge against inflation but a hedge against an aggressive Federal Reserve. Remember, sellers are buyers, and we lack both to push more housing demand in the existing home sales market.
Mortgage rates only kept climbing in the last week. Buyers in this real estate market notice these affordability changes, and so we can see in the data fewer home purchase offers, slightly climbing unsold inventory, and slightly more price reductions for the homes that are on the market. This is the same pattern as we talked about last week. The first half of the year had surprisingly resilient sales, but that is slowing again. Mortgage rates are at their highest level in 20 years because the economy just keeps reporting strong data. And every uptick in mortgage rates leads to a downtick in the number of home buyers in the market.
Rising rates make more inventory. So how much inventory will we add this fall? Well as of now, these slowing signals are subtle. This housing market is much different from last year at this time. Last year, rates climbed dramatically and so did inventory. Now rates are inching up, and so is inventory. If mortgage rates jump to say 8%, that’s when we’d see big changes in inventory and home prices. Keep watching these numbers here.
Inventory
Inventory of unsold homes on the market is ticking up. It now doesn’t look like next week will be the peak of inventory for the season. It looks like inventory will keep climbing into September. There are now 495,000 single-family homes unsold active on the market. Inventory rose by just under 1% again this week.
This inventory climb at the end of August is not unusual. It’s not a rapid rise, but it also doesn’t appear to be leveling off. Inventory often peaks the last week of August, the fall has fewer sellers and it keeps shrinking through the holidays. Now because mortgage rates have been notably climbing for the last several weeks, we also expect inventory to keep climbing into September as fewer buyers make offers on the existing inventory.
There are 10% fewer homes on the market now than last year at this time. Last year inventory spiked from March through July with spiking mortgage rates. Then it leveled off a bit. So this week inventory lost ground on last year. The inventory gain week to week was more than it was last year at this time. That’s the first time this happened in many months. Last week there were 10.5% fewer homes on the market, this week that’s only 10% fewer. This is one of the subtle signals that higher mortgage rates have slowed this year’s home buyers again.
To understand the future of housing inventory in this country remember the Altos Rule. The Altos rule says that the more available inventory of homes to buy is the result of higher mortgage rates. If rates climb, so does inventory. If rates fall, inventory will fall.
There are 365,000 single-family homes in contract now. That’s up a fraction from last week and 10% fewer than last year at this time. New pending sales of single-family homes going into contract this week came in at 63,000 vs 70,000 last year. In this chart, the height of each bar is the total number of homes in contract that week. The light red portion of the bar represents those newly in contract. The sales rate has slowed since rates did their latest jump of over 7%. In fact, I’d expect the NAR headlines to keep falling on the pending sales measure as well. We could see the sales rate tick down to four million annually on their seasonally adjusted annual rate in the next couple of months.
I’m looking forward to the time when the real-time data starts to grow and the sales rates look more bullish than the headlines, but that’s not happening yet. As we watch the new pending home sales data each week, the next trend we’ll be looking for is how quickly the new pending sales rate shrinks this autumn. See in the chart how the light red portion of each bar shrank so quickly last fall. We had some recovery in the first half of this year. We started the year with 30% fewer homes in contract.
That gap narrowed to just 10% fewer. But we’ve been unable to get closer than that. The market was accelerating this spring, but it is not doing so now. I suppose these negative swings are the other side of the coin for what I’ve called a soft landing in housing. Housing demand cratered, but home prices didn’t crash. Home prices declined in July and September last year, and recovered a bit in the first half of this year. Now demand is softening again and that will keep home prices from appreciating much from here.
American homebuyers are very sensitive to mortgage interest rates. And while higher mortgage rates have hurt affordability for so many, it’s really the change in rates that spur changes in demand. Early this year we had more home buyers than sellers, even with rates in the six-percent range. When rates jump to 7.2% that’s when we see the demand data react accordingly. So it’s not the absolute level, it’s the change in rates that we should be paying attention to.
Price
And we can see it in the home price reduction data too. Price reductions are about to inch above 2018 and 2019 again. 35.5% of the homes on the market have had price reductions. Price cuts always tick up late in the summer, and this year’s seasonal increase is speeding up just a bit with the recent higher mortgage rates. Each week we have slightly fewer buyers, making slightly fewer offers, so slightly more sellers cut their asking prices.
Watching this price reduction curve has been so valuable lately. So insightful. In this chart, each line is a year. You can see last year’s light red line started climbing in March. That told us the pandemic frenzy was over. In September last year, price reductions spiked again with mortgage rates. This year, the dark red curve showed us how rapidly the market was recovering. That told us there was a floor on how far home prices could fall. It really highlights how effective this stat is for understanding the future of home sales prices. Right now 35.5% of the homes on the market have had a price cut.
This is a totally normal level. It is rising, not rising fast, it’s not a strong signal, but it is rising faster than in recent years for August. That tells us that sellers are seeing fewer buyers than they anticipated. This buyer slowdown means any home price appreciation we’ve had year over year is weakening and may be in jeopardy.
Tracking price reductions on the listed homes on the market is really insightful at the local level too. Right now we can see for example that Austin Texas has the most price reductions of any big market and that seems to be climbing. You can use the Altos data to understand local differences which are so important right now.
The median price of single-family homes right now across the country is $449,900. That’s basically unchanged from last week and from last year. Prices tend to cluster around the big round numbers, in this case, $450,000, with a big group priced just under that for search purposes. So home prices are at this $450,000 plateau for a while. That’s the dark red line on this chart. See at the far right end the little plateau. Home sales prices in the future are falling because we can see the ask prices are very stable. Much more stable than they were last year at this time.
The median price of the newly listed cohort this week is $399,000 again that’s also unchanged from last week. That’s the light red line on this chart. The price of the newly listed homes is 1.3% higher than last year at this time. This is when homes go on the market, the sellers and the listing agents know where the demand is, where the buyers are and they price accordingly. So the price of the new listings is an excellent leading indicator of where home sales prices will be out in the future.
We’re in this tricky space looking at year over year home price changes now. Last year the market was slowing so quickly that the comparisons now to last year start to look easier. Prices were falling last year with frozen demand. This year the market is slowing gradually. You can expect that the annual home price appreciation would continue to improve even though the momentum is a bit negative right now. It looks like we’ll end 2023 with home prices up a few percent over where 2022 ended.
And when we look at the price trends for the homes going into contract, we can see the earliest proxy for the sales which will actually close and get recorded in September and October. You can see that the last several weeks have put a little downward pressure on what home buyers are willing to pay. See how the dark red line was above last year for a few months and then in recent weeks, the dark red line is compressing closer to the light red line. That’s sales prices giving up their annual gains with higher mortgage rates.
The median price of the homes that went into contract this week is $378,000. That’s up a tick from last week and over last year, but you can see in the chart the dark red line is drifting lower. Now, the sales comparison gets a lot easier in September when we had that big rate spike in 2022. So assuming we don’t have another mortgage rate spike, the annual price appreciation will continue to improve. On the other hand, if we see 8% mortgage rates, there’s no reason to believe that home prices can’t gap down again like they did last year.
Again this is a very clear reaction to the latest surge in mortgage rates. We have fewer buyers and those buyers are willing to pay just a little bit less. The opposite is true too. If rates were to drift lower, you can expect more buyers, less inventory, fewer price cuts and higher prices in data measures like this one the price of the newly pending sales each week. The data is very clear right now.
The average U.S. mortgage rate for a 30-year fixed loan is 2.87% this week, dropping one basis point from last week’s 2.88%, Freddie Mac said in a report on Thursday. The rate is now one basis point from an all-time low set in mid-September.
The average fixed rate for a 15-year mortgage was 2.37%, rising one basis point from last week’s 2.36%, the mortgage securitizer said.
Mortgage rates that have stayed below 3% for 11 consecutive weeks have boosted housing demand, acting as a counter-weight for an economy that is struggling amid the worst public health crisis in more than a century.
“With near-record-low rates, buyer demand remains robust with strong first-time buyers coming into the market,” said Sam Khater, Freddie Mac’s chief economist. “The demand is particularly strong in more affordable regions of the country such as the Midwest, where home prices are accelerating at the highest rates over the last two decades.”
Sales of existing homes rose to a 14-year high of six million at an annualized pace in August, the National Association of Realtors said in a report last month.
Combined sales of single-family houses, townhomes, condominiums and cooperatively owned apartments rose 2.4% from July, according to the report. Compared to a year ago, prior to the COVID-19 pandemic, August’s sales were 11% higher, NAR said.
“The buyers are coming in because of the low interest rates – that’s the number 1 reason,” said Lawrence Yun, NAR’s chief economist.
The low rates are also putting upward pressure on home prices, because cheaper financing typically means borrowers qualify for bigger mortgages and can bid higher for properties they want. The median existing-home price in August was $310,600, up 11.4%, and prices rose in every region, NAR said.
The boost in demand that comes from the low rates have worsened an inventory shortage that plagued the market long before the pandemic hit the U.S.
The number of homes on the market at the end of August totaled 1.49 million, down 18.6% year-over-year, the NAR report said.
Unsold inventory measured as a “months supply” number that gauges how long it would take to sell all the homes if nothing else came on the market, was three months, NAR said. That’s down from 3.1 months in July and compared with four months a year ago.
The average U.S. mortgage rate for a 30-year fixed loan is 2.9% this week, up from 2.87% last week, Freddie Mac said in a report on Thursday. It’s the ninth consecutive week the rate has been below 3%.
The average rate for the less-popular 15-year mortgage was 2.4%, rising from last week’s record low of 2.35%, the mortgage giant said.
Sub-3% rates are boosting real estate demand and fueling bidding wars. U.S. home prices jumped more than 2% between May and July, the largest two-month gain on record, as Americans emerging from COVID-19 lockdowns bought real estate, the Federal Housing Finance Agency said in a Wednesday report.
“Historically low interest rates are the primary driver behind the strength in housing demand that we’ve seen in recent months, and that has led housing to be a bright spot for the overall economy,” Robert Dietz, chief economist of the National Association of Home Builders, said in an interview.
Rates started tumbling after the Federal Reserve committed to buying mortgage-backed securities in March to keep credit flowing amid the worst pandemic in more than a century. Because of that, the average U.S. rate for a 30-year fixed mortgage, as measured by Freddie Mac, has hit new lows nine times since COVID-19 first started spreading in America.
Sales of existing homes rose to a 14-year high of 6 million at an annualized pace in August, the National Association of Realtors said in a report on Tuesday.
Combined sales of single-family houses, townhomes, condominiums and cooperatively owned apartments rose 2.4% from July, according to the report. Compared to a year ago, last month’s sales were 11% higher, NAR said.
The median existing-home price last month was $310,600, up 11.4% year over year, and prices rose in every region, according to NAR.
The Economy, Though Volatile, Has Shown Resilience in the Face of Rising Interest Rates
The housing market has also been impacted by high rates as millions of homeowners locked into previously low mortgage rates and are content to remain in their current homes, therefore helping to keep inventory low
The U.S. economy has been resilient in the face of rising interest rates and grew at its long-run average rate of 2% during the first quarter of 2023. The labor market remains strong with an unemployment rate below 4% and rising labor force participation for the 25–54-year-old age group. The housing market has also been impacted by high rates with millions of U.S. homeowners locked into previously low mortgage rates and content to remain in their current homes, helping to keep inventory low and the balance tilted in favor of home sellers over buyers in most markets. In this month’s spotlight we show that this “mortgage rate lockin effect” is the largest ever in U.S. history, and is likely to impact the housing market for years to come.
Recent developments in the U.S. economy
Per the U.S. Bureau of Economic Analysis, the third and final estimate of first quarter 2023 Real Gross Domestic Product (GDP) was much stronger than previously reported. Quarterly growth was revised up 0.7 percentage points to an annualized rate of 2%. While real GDP was revised upwards, the pace of growth continues to slow mainly due to the drag from the interest rate-sensitive sectors such as residential fixed investment and business investment. But the undaunted U.S. consumer has remained resilient, and consumer spending grew at an annualized rate of 4.2% in the first quarter, contributing to the upward revision of real GDP growth.
Consumer confidence and sentiment play a pivotal role in boosting consumer spending. The Conference Board’s June 2023 measure of consumer confidence jumped to the highest level since January 2022, reflecting improvements in the current conditions as well as in the future expectations. Expectations of inflation fell in June to 6%, the lowest reading since December 2020.
On the labor market side, according to the Bureau of Labor Statistics Employment Situation Summary for June 2023, the economy added 209,000 jobs in June led by the government, health care, social assistance, and construction sectors. The unemployment rate ticked down to 3.6% to remain near 50-year lows. The prime age (25–54-year-old) labor force participation rate has been rising and is now at the highest level since April 2002 (Exhibit 1). This suggests that the tight labor market is bringing many of the younger workforce, who were on the sidelines, back into the market.
The economy added 209K jobs in June, and the unemployment rate ticked down to 3.6% to remain near 50-year lows.
Inflation has been cooling in recent months, and the measure tracked by the Federal Reserve, the U.S. Bureau of Economic Analysis’ “core” price index for personal consumption expenditures, excluding food and energy (Core PCE), came in at 4.6% year-over-year in May. While housing continues to be the largest contributor to the increases in inflation and prices, it has started to cool off. Another inflation measure that the Federal Reserve has been tracking recently is the supercore service inflation (core services excluding energy and housing). Supercore inflation has been decreasing and the year-over-year change in May 2023 came in at the lowest since March 2022.
Inflation has been cooling in recent months, and the U.S. Bureau of Economic Analysis’ “core” price index for personal consumption expenditures came in at 4.6% year-over-year in May.
Recent developments in the U.S. housing market
The divergence between existing home sales and new home sales has grown wider in recent months. Existing home sales receded 20% from a year ago, while new home sales surprised on the upside and increased 20% from a year ago in May. The mortgage rate lock-in effect continues to impact the listings of existing homes, which are down 35% as of April 2023, compared to the pre-pandemic average between 2016-19 (Exhibit 3). Pending home sales, which are a forward-looking indicator for existing home sales, also declined during May and were down 2.7% over the month and 22.2% over the year according to the National Association of Realtors®.
On the other hand, according to the NAHB/Wells Fargo Housing Market Index builder confidence improved to the highest level in nearly a year due to continued housing demand and easing of supply chain issues, as well as the lower level of existing homes for sale. All three subcomponents of the HMI increased: the sales expectation component saw the greatest increase of 6 points to 62, current sales conditions increased 5 points to 61, and buyer traffic rose 4 points to 37.1 The current sales conditions and the sales expectations rose to levels above 60 for the first time in a year as homebuyers warm up to mortgage rates in the 6-7% range.
This increased builder confidence was also reflected in the housing starts, which jumped 21.7% in May. Furthermore, the monthly increase in total starts at 291,000 units was the highest in over three decades. Permits also increased over the month of May and were up 5.2% on a month-over-month basis, despite being down 12.7% year-over-year.
House prices may have bottomed and continue to firm up in the short run. Per the FHFA’s Purchase- Only House Price Index, house prices increased nationally 0.7% from March to April 2023. While house prices increased across all the divisions over the month of April—ranging from +0.1% in the Pacific division to +2.4% in the New England division—the variation is wider when we consider the house price appreciation as compared to a year ago. The 12-month changes ranged from -3.8% in the Pacific division to +6.1% in the East South-Central division.
Recent developments in the U.S. mortgage market
The 30-year fixed-rate mortgage as measured by our Primary Mortgage Market Survey®, settled at 6.7% in June, partly due to the Federal Reserve’s decision to pause increases in the Fed Funds Rate. Partially in response to the stabilization in mortgage rates, purchase applications increased 7.1% over the month of June, while refinance applications increased 2.8%, both after seasonal adjustment according to the Mortgage Bankers Association Weekly Applications Survey.
Delinquency rate went down 11 basis points in May to 3.1%, close to the historical low of 2.92%; foreclosure starts remain 41% below 2019 levels.
With respect to mortgage performance, the delinquency rate, as measured by loans 30 or more days past due went down 11 basis points in May to 3.1%, close to the historical low of 2.92%, according to Black Knight’s May Mortgage Monitor. Serious delinquent loans (90 or more days past due) also fell by 18,000 over the month and are down around 30% since May 2022. While foreclosure starts increased 2.2% over the month of May, they remain 41% below 2019 levels.
The outlook
The outlook remains volatile as we enter the second half of the year. The Federal Reserve’s pause on interest rate hikes after ten consecutive increases since March 2022 was a welcome breather for the economy. The labor market remains strong with low unemployment and inflation appears to be moderating. Downside risks as a slowing economy could tip into recession, but on balance our outlook is cautiously optimistic.
General economy, rates, inflation
The U.S. economy will continue to grow, unless consumers pause their spending. While the labor market is gradually moderating, it remains sufficiently tight, and combined with consumers’ excess savings and recent wage gains, consumers will continue to spend and the economy will continue to expand, although at a reduced pace.
While the labor market is gradually moderating, consumers will continue to spend, and the economy will continue to expand, although at a reduced pace.
Under our baseline scenario, we expect inflation to continue cooling as the long and variable lags of monetary policy work through the economy. The slowing growth in prices of goods and services will further reinforce consumers’ purchasing power. However, even though inflation is expected to slow it will be gradual and the pressure on long term rates including mortgage rates will not likely abate this year. Therefore, we expect mortgage rates to stay above 6% for the second half of 2023. High mortgage rates will increase the cost of owning a home, likely leading to a reduction in other spending. However, savings from cooling inflation could be enough to offset the increased housing costs. If this is the case, consumers will keep spending, and the economy will continue to grow unless the labor market further moderates significantly.
Home sales
On the housing front, home sales are plagued by a combination of a lack of inventory of existing homes and high mortgage rates. Due to the mortgage rate lock-in effect (described further below), many existing homeowners are unwilling to list their homes for sale, and we do not expect sufficient existing homes to come on the market any time soon to significantly boost existing home sales. Therefore, we expect existing home sales to remain low through the rest of 2023. However, new home sales are expected to pick up through the rest of the year. Although new home sales’ contribution to the total sales has been increasing in recent months, they are a fraction of the total home sales, we expect total home sales to remain muted for the rest of the year.
Home prices
Our official corporate forecast for the next 12 months has house prices falling by 2.9% and an additional 1.3% over the subsequent twelve months. However, given the current housing market conditions with historic low inventory and an early read on our data, we will likely revise our home price forecast in the next iteration of the Economic, Housing and Mortgage Market Outlook. We expect tight inventory will push sales volume down, and we expect it to keep home prices up.
Mortgage originations
Due to lower home sales, purchase origination volumes are expected to remain muted this year, while high mortgage rates keep refinance activity low. As homebuyers get accustomed to the new normal in terms of mortgage rates, we expect home sales to pick up and purchase originations to resume modest growth in 2024.
JULY 2023 SPOTLIGHT:
Mortgage rate lock-in and the housing market
The recent rapid increase in mortgage rates from historical lows to 20-year highs has created a scenario that we have not seen in more than 40 years. Because so many households have a fixed-rate mortgage, which exists in part because of financing from Freddie Mac and Fannie Mae, they were able to refinance into low interest rates in recent years. This contrasts with variable-rate mortgages, which have increased significantly as a result of rising mortgage rates. Nearly 6 out of 10 borrowers now have a mortgage rate at or below 4%. Given current market rates, many of those homeowners have locked in payment savings, but they also may have locked themselves into a forever home. Throughout this spotlight we use the term “mortgage rate lock-in effect” to refer to the ownership of a mortgage on favorable terms compared to current market interest rates.
Nearly 6 out of 10 borrowers now have a mortgage rate at or below 4%. While those homeowners have locked in payment savings, they also may have locked themselves into a forever home.
The mortgage rate lock-in effect is a benefit to homeowners with fixed-rate mortgages. To illustrate the benefit of the mortgage rate lock-in effect, suppose a lucky homeowner has refinanced their mortgage of $250,000 at 2.65% in January of 2021. Their current monthly principal and interest payment would be $1,007 and after 29 months of payment their current outstanding balance would be $236,379. If the borrower obtained a new 30-year mortgage of $236,379 at the prevailing market interest rate of 6.81%, their monthly payment would increase to over $1,500 a month.
Following Quigley2, we compute the net present value of the mortgage rate lock-in effect by taking the difference between the outstanding balance of the mortgage and the present value of the mortgage at prevailing market interest rates.3 The value of mortgage rate lock-in is $86,136 in our example.4
Except for certain limited cases, the mortgage is not portable or assumable. In today’s market, most mortgages have due-on-sale clauses, requiring the borrower to terminate the mortgage when they sell the property. To enjoy the benefit of the value of their low mortgage rate, the borrower must continue to live there, maintain it as second home, let it sit vacant or rent it out. In our example, the homeowner is only going to be willing to sell their current home, and thus give up their low mortgage rate, if the net benefit of a move is worth at least $86,136. For some households who are pursuing a new job opportunity or moving to be closer to family the move could be worth it, but others may opt to stay put.
The national average mortgage rate lock-in effect for 30-year and 15-year fixed rate loans is $55,000.
For each 30-year and 15-year fixed rate loan in Freddie Mac’s portfolio active as of June 2023, we computed the value of the mortgage rate lock-in effect.5 Per these calculations, the national average mortgage rate lock-in effect is $55,000 per household but because of differences in average loan sizes and the timing of originations and the history of refinance activity, the average value varies considerably across the country and by year of origination. Across geographies the average mortgage rate lock-in effect varies from a high of $91,000 in Hawaii to a low of $32,000 in West Virginia. Considering year of origination, the highest average values are for loans originated in 2020 and 2021 with average mortgage rate lock-in effect of $77,000 and $85,000, respectively. But, as rates continue to increase, even mortgages originated in 2023 have an average mortgage rate lock-in effect of $10,000.
To get a sense of how significant the mortgage rate lock-in effect is for the U.S. economy, we can sum the mortgage rate lock-in effect over the Freddie Mac portfolio. Considering only 30-year and 15-year fixed-rate mortgages financed by Freddie Mac, the aggregate mortgage rate lock-in effect for borrowers in Freddie Mac’s portfolio is substantial. We estimate that, considering the company’s single-family mortgage portfolio, homeowners with fixed-rate mortgages financed by Freddie Mac have locked in savings of a collective $700 billion dollars in total value. This is equal to about 25% of the outstanding unpaid principal balances in Freddie Mac’s single-family mortgage portfolio.
Our aggregate estimate of 25% of outstanding mortgage balances is significant and shows that many have truly benefitted from their fixed-rate mortgage when rates hit record lows. For comparison, Quigley calculated the average mortgage rate lock-in effect equal to $1,800 in 1981 for households with mortgages, which represented about 5% of outstanding mortgage balances versus about 25% today.6 In Exhibit 4 (on the following page) we show a time series of quarterly average mortgage rate lock-in effect in the Freddie Mac portfolio since 2018. From March 2019 through December 2021, the average lock-in effect was negative, meaning that the average borrower had significant incentive to refinance. But since March 2022, the average lock-in effect has surged, reaching over $50,000 in each
of the past four quarters.
The mortgage rate lock-in effect is already having a significant impact on the U.S. economy and will likely continue to do so for years to come. One of the major challenges to the current U.S. housing market is a lack of available-for-sale inventory. The lock-in effect is yet another layer contributing to the dearth of available inventory. How much so is an active area of research.
Footnotes
1 The Housing Market Index is a diffusion index normalized so that a value of 50 indicates sentiment balanced between positive and negative. Any value above (below) 50 indicates that on average survey respondents have a positive (negative) sentiment. For more information on the index see https://www.nahb.org/news-and-economics/housing-economics/indices/housing-market-index.
2 Quigley, J.M., 1987. Interest rate variations, mortgage prepayments and household mobility. The Review of Economics and Statistics, pp.636-643.
3 The net present value of the mortgage rate lock-in effect is denoted by V and computed by using the value of the current mortgage balance (B) and the present discounted value of the payments (P) using prevailing market interest rates (r) discounted over the remaining (n) periods of the loan:
4 In our example, the borrower’s current balance B is $236,379, but the present value of the monthly payments (P=$1,007) discounted for the remaining (n=331) months at 0.005675 (r=6.81/1200) equals $150,243. Thus, the value V is $86,136 ($236,379-$150,243) which represents the value the borrower gets by having locked in a low mortgage interest rate.
5 Due to curtailment, or early payment of principal, our formula is slightly more complicated than the one presented above. To adjust for cases of curtailment we use the modified formula:
Where n is now the remaining months left adjusting for curtailment and F is the residual partial payment due in period n to pay off the remaining balance.
6 Per the 1981 American Housing Survey (https://www2.census.gov/prod2/ahsscan/h150-81a.pdf page 10 Table A-2) there were about 27 million households with a mortgage in the U.S. Multiplying $1,800 by 27 million gives us a little less than $50 billion in aggregate mortgage rate lock-in effect in 1981. Per the Financial Accounts of the United States, the total mortgage debt outstanding on 1-4 family housing was $1 trillion in 1981. $50 billion / $1,000 billion = 5%.
Home mortgage rates have surged past 7%, hitting the highest level in more than 20 years and dealing another blow to Americans trying to break into the housing market.
The average rate on the popular 30-year fixed mortgage was 7.09% this week, up from 6.96% last week and the highest since 2002, according to data released Thursday from mortgage giant Freddie Mac.
One month ago rates were at 6.78% and for much of the year held in the low-to-mid-6% range.
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But borrowing costs have been on the rise lately. Inflation is a major driver of mortgage rates and amid continued economic growth investors increasingly think inflation will prove stickier than they hoped.
Those investment bets have a big effect for potential home buyers.
The difference between a 6.78% rate and a 7.09% rate adds an extra $133 to the monthly mortgage payment for an $800,000 house. Compared with where rates were in early February, today’s payment is $422 more for the same priced house.
The last time rates were higher than today was in 2002, but they briefly hit 7.08% — just under this week’s levels — in fall of last year.
At the time rates were exploding, more than doubling in a year as inflation soared and the Federal Reserve reversed easy money policies.
The rapid rise quickly sapped buyer borrowing power and caused home prices to fall. But today’s buyers face a different market — one where prices are rising.
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After rates fell into the 6% range this year, a fair number of first-time home buyers returned. But existing homeowners were less willing to list their homes and give up their sub 3% mortgages.
The result has been an extreme shortage of homes for sale that’s once again driving up prices.
In July, the average home price across the six-county Southern California region was $823,398, according to data from Zillow. That’s up 1.2% from the prior month, and the six straight month of increases.
What happens next with prices depends on a variety of factors, including the direction of the overall economy and mortgage rates.
If rates stay where they are today or climb higher, it could sap demand enough to stanch further price increases. But if higher rates keep even morehomeownersfrom listing their homes, it might not make much of a difference.
Rick Palacios Jr., research director with John Burns Research and Consulting, said it typically takes a rapid rise in rates, rather than a slow climb, to significantly hit housing demand.
Unlike Freddie Mac, industry publication Mortgage News Daily provides a daily tracker of borrowing costs and put Thursday’s average rate at 7.37%.
“Our price forecast for Los Angeles is flattish, but that was assuming rates were going to cap out around 7%,” Palacios said. “We are now eclipsing that.”