low mortgage rates

Apache is functioning normally

Apache is functioning normally

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Available inventory of homes for sale is on the rise in late September, which is very unusual for this time of year. In fact, inventory is growing faster than this time a year ago.

This is a demand-driven slowdown, because new listings supply is still running 9% to 10% fewer homes for sale each week than this time last year. We’re seeing fewer new sellers each week, but inventory is building as homebuyers wait to see if mortgage rates will come down to make purchases more affordable. 

What’s happening with inventory?

Fewer new sellers also means that inventory can’t grow too much; the real trouble develops when demand drops and supply surges. There’s no supply surge, but there is a notable demand drop. Consumers are very sensitive to changes in mortgage rates, and rates are still rising. 

We can see these slowing changes build up each week. It’s a pretty sharp change from what was a surprisingly strong first half of the year. There are now 528,000 single-family homes on the market. That’s an increase of 1.8% from last week. 

Normally by this point in September, available inventory is declining slightly each week. It’s late in the summer, so normally new listing volume drops as the last few sales of the peak summer months are concluding.

The fact that inventory grew by nearly 2% this week and last week is telling of how homebuyers are reacting to the highest mortgage rates in over two decades. 

In this chart of each year’s inventory curves, you can see that the number of homes on the market is climbing faster now than this time last year. This year is the dark red curve, and last year the light red. Mortgage rates continue to climb, so there is no immediate relief for homebuyers on the horizon either.

At this point, it looks like we may see inventory grow to the end of October like we did last year. Look at the divergence in the curves from this year and the tan line from two years ago when we were still in the middle of the pandemic housing boom and record-low mortgage rates.

Pending-home sales continue to lag

New pending sales each week continue to run 10% to 15% below last year’s pace. If you follow the National Association of Realtors when they publish their existing-home sales report each month, you know that the latest report for August showed a sales pace of only 4 million seasonally adjusted annual home sales.

We can already see in the NAR data that there are no signs of improvement for the sales count through September and October. The home sales that are in contract now will close mostly in October. It’s not hard to imagine that next month’s seasonally adjusted home sales data from NAR will come in under 4 million. 

In this chart, each bar is the total number of home sales pending on any given week. The shorter the bar, the fewer sales that are in progress. The light portion of the bar is the count of new pendings each week.

There are now 344,000 single-family homes in contract to close in the next couple months. That’s 14% fewer than last year and almost 30% fewer than in September of 2021.

Home sales are limited by the decreased demand, of course, and they’re also limited by the very low supply of new listings. You can’t buy what’s not for sale.

We’ve been talking all year about the market being supply constrained. Right now, sales are limited by declining demand from still-climbing mortgage rates.

Price reductions climb again

We can see the impact of weaker demand starting to creep into the pricing indicators. In the chart below, we look at the leading indicator of this trend: price reductions. This is the percent of homes on the market that have taken a price cut from their original list price. 

For a while earlier this year, demand was exceeding supply in residential real estate, and you could measure that demand with the price-reductions curve improving each week. As mortgage rates lurched over 7% to their new highs, suddenly there are fewer offers.

And home-price reductions are climbing again, with 37% of the market taking a price cut. That’s more than any recent year except last year at this time. Price reductions are accelerating now, which bodes negatively for future sales prices.

A normal, balanced market will have 30% to 35% of the homes for sale that have reduced their asking price in recent months. As this dark red line approaches 40%, that’s a clear indicator that buyers are making fewer offers. Remember, the slope of this line captures how many properties are taking new price cuts each week. And this slope is increasing now.

These are transactions that will happen in the future, so it implies sales price weakness in the fourth quarter, which you’ll hear about in the headlines after the new year. But you can see it in the data now.

The median sales price of single-family homes in the U.S. right now is $440,000. That’s down 1% from last week and it’s just a tiny fraction higher than this time last year.

We can see the pressure on home prices in recent weeks. Home prices step downward in September for the seasonal change every year, and you can detect strength or weakness relative to changes in other years.

What we see now is that year-over-year price gains are just barely positive. And the comparison is getting weaker, not stronger, as our current mortgage markets deteriorate. There are fewer offers, and those that do happen are doing so at slight discounts each week. 

Last year at this time, there were big price discounts being applied. So, our October comparisons may get slightly easier, but I sure haven’t seen any signals of price strength now.

Looking ahead to the end of 2023

So the question is will Q4 this year be a little better than Q4 2022? The median price of the new listings is fractionally higher than last year at $398,500. It will be fascinating to watch the light colored line here over the next couple weeks.

The new listings are where you see price weakness first. And last year, they were already headed lower.

The price of the new contracts this week came in at $370,000. These are the pending-home sales that went into contract in the last week. Prices of the homes going into contract are lower than last year by a fraction.

The next few weeks will be interesting to track this stat, too. Last year in mid-September is when mortgage rates jumped from 6% to 6.5% to 7.5%. By early October, any offers that were made for purchases came in at notably lower price points.

By September 2022, new pending-home sales prices fell by 3% per week. Will that happen again? Mortgage rates are even higher now than they were last year.

In this chart, you’ll notice the light-colored line started a big decline during this week in 2022. That’s when buyers reacted to newly increased mortgage rates. So, we’re watching to see where the new contracts come in over the next few weeks.

The macro trends impacting mortgage interest rates and the Fed have not given us any reprieve yet. The signals are that mortgage rates are still headed higher.

Consumer expectations for future mortgage rates have moved higher, too, so potential homebuyers are less optimistic than they were at the start of the year. And that’s what we’re seeing in the data each week now.

However, it’s important to point out that while buyer demand has backed off this fall, there is still no sign of any surge in new supply coming to the market. It can be very easy to focus on the negative momentum.

People on the fence should also know that while their competition is lessening, there’s no sign of an inventory flood. That may be an important factor in their home-buying decisions.

Mike Simonsen is president and founder of Altos Research.

Source: housingwire.com

Apache is functioning normally

By David Piscatelli

Fed’s inflation fight tightens the U.S. housing supply and makes home buying even more difficult

Conventional wisdom dictates that U.S. inflation will continue to decline as the Federal Reserve keeps interest rates high. This action, which makes loans more expensive for businesses and consumers, should lead to less spending, less consumption and higher unemployment.

Or at least that’s Econ 101. Yet both consumers and investors have acclimated to the current market environment. Moreover the key driver of inflation — housing — cannot be adequately contained through the Federal Reserve’s usual tactics.

In fact, the Fed’s policies have created a Catch-22 in the housing market by creating “golden handcuffs.” Instead of easing consumer demand, the Fed’s actions unintentionally restricted U.S. housing supply, resulting in a stalemate between home buyers and sellers. Homeowners who locked into historically low mortgage rates before and during the pandemic are now reluctant to sell, which in turn is increasing the likelihood of persistent higher inflation.

The case for this condition to persist , which the market is mostly failing to consider, continues to grow stronger as the odds of a recession fade. This should be an alarm bell and a potential opportunity for investors to redeploy at least part of their capital into hard assets to serve as a hedge against inflation risk.

The recession that never was

Many economists have predicted that a recession would hit the U.S. Their reasoning was sound: aggressive monetary action by the Federal Reserve, investor dissatisfaction with inflation, loss of consumer confidence and reductions in home asking prices — all points that were hard to argue against.

Yet most of the key ingredients needed for a recession have not materialized. Investors have acclimated to inflation, consumer confidence is growing and the housing market has, by and large, entered a period of stalemate where prices remain high due to lack of supply.

In fact, the only relevant argument in the recession camp that remains is the Fed continuing its aggressive posture against inflation — now considered the fastest monetary policy tightening cycle in more than 40 years. Such action continues to lead many to speculate that recession is imminent, and the only questions left to answer are “when,” and “how deep it will be?”

Housing prices obey the laws of supply and demand

Housing is perhaps the most consequential category that makes up the Consumer Price Index (CPI), which markets track every month as a core measure of inflation.

The undersupply of housing in the U.S. is grounded in years of underbuilding and is not the result of a single federal policy, war, or external event. If anything, the power to create more housing supply rests with state and local governments, which often require working through a patchwork quilt of differing zoning and land-use regulations.

The high estimate of the country’s current housing shortage is pegged at about 7.3 million units, while the most conservative estimate shows it to be about 1.7 million. While the true shortage is most likely somewhere inbetween, the bottom line is that the United States faces a textbook housing shortage that cannot be solved overnight. Worse, the Fed’s current policies are making the prospect of home ownership even more difficult.

Nobody wants to move and reset their loans at much higher rates.

Central bank measures designed to clamp down on inflation by making borrowing more expensive (which theoretically should drive down the costs of homes), are having the opposite effect. This is because homeowners, who locked in historically low mortgage rates before and during the pandemic, are now reluctant to sell their home.

Simply put, nobody wants to move and reset their loans at much higher rates. Would-be sellers are therefore sitting on the sidelines, which has unintentionally created an even greater shortage in supply. Meanwhile, potential buyers, who cannot afford higher mortgage rates, are incentivized to rent instead.

To end this stalemate, the Fed would need to start cutting interest rates, which it has stated is unlikely this year. But if inflation is being driven by the cost of housing, as demonstrated in the Consumer Price Index, more attempts to tame inflation via rate hikes suggests homeowners will only become more entrenched as supply dwindles further As the labor market continues to prove surprisingly resilient, homeowners, and by extension everyday consumers, don’t seem to mind waiting it out.

Read: Nouriel Roubini says a return to 2% inflation is ‘mission impossible’

Also: Most long-term investors can ignore the Federal Reserve’s latest move

The case for hard assets

Seasoned investors know that during times of rising interest rates, restrictive credit and prolonged inflation, more investments flow into “hard” asset classes such as real estate. This hedging strategy is used almost like an insurance policy by investors to preserve capital from the depreciating effects of inflation. And according to research, it works. For example, a Stanford University study found that residential real estate is historically an investment haven during inflationary periods. Even during the inflation of the 1970s, home prices increased relative to the size of the economy. This is because housing is typically tied to consumer prices and rises with inflation.

With housing assets so closely tied to inflation, as well as to the laws of supply and demand, investments in this hard asset class deserve due consideration. Strong economic growth, coupled with the one-two punch of resilient consumer spending and near record-low unemployment, is good news. It also means the Fed won’t be lowering rates soon. Housing will remain a key driver of inflation, and future rate-hikes will further entrench homeowners and push more would-be buyers into renting.

To achieve a return to 2% inflation, U.S. policymakers would be wise to work with state and local governments to incentivize development, which would drive down the greatest expense for most Americans. But even with decisive action, fixing the fundamental housing shortage that is responsible for sustaining stubbornly persistent inflation will be a longer process than most investors realize.

David Piscatelli focuses on research, economic analysis and strategy at Avenue One, a property technology service platform and marketplace for institutional owners, buyers and sellers of residential homes. Views of the writer do not necessarily reflect the views of Avenue One.

More: Meet the brave Americans buying and selling their homes, despite stubbornly high interest rates

Plus: 9 ways home buyers can stretch their dollars even though mortgage rates are high

-David Piscatelli

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

09-23-23 0837ET

Copyright (c) 2023 Dow Jones & Company, Inc.

Source: morningstar.com

Apache is functioning normally

Apache is functioning normally

What a difference a few months make in the real estate market. Last summer, home prices were selling on the cheap in many cities across the nation.

Fast forward to spring, and the housing market kind of “sucks.” There’s really no other way to put it.

First off, there’s no inventory. This has been an issue for a while now.

Put simply, there’s just very little out there for an individual or family looking to buy a home, at least in the areas they might want to live.

Sure, there are those properties that have been on the market for months, but there’s a reason they’ve been on the market for months.

And yes, you can probably go to a new community built by a mega home builder and find a house, but it’ll likely be on the fringe of a major city next to empty dirt lots and tractors.

Bad Inventory Rising

  • Because there is a shortage of homes to buy
  • Prospective sellers are able to list their duds
  • Knowing that buyers are becoming increasingly desperate
  • And may overlook flaws or simply settle as a result of the slim pickings available

Now that the housing market is heating up and the media is (rather obnoxiously) getting on board, inventory is finally rising. Let’s call it an inevitable timing thing.

You see, there is real hope in the housing market. And while hope is good for some, it’s not good for buyers, just sellers who finally see the light after so many years in the dark.

Their real estate agents are giving them the green light to dump their properties while avoiding the lengthy short sale process and nasty credit score ding.

Today, these would-be sellers are able to push the values just that little bit more to sell them as standard sales, instead of going the formerly popular short sale route.

After all, a short sale made sense when there was no hope of getting out unscathed, but now that things are looking up, why not hang on a touch longer and avoid the negative ramifications of selling short?

Unfortunately, this means the individual on the other end is picking up the slack at an inflated price, instead of snagging a deal.

Competition Is Extremely Fierce

  • Not only are the available homes often less desirable
  • But the competition for these properties is much higher than normal
  • Making the housing market a really bad place to be as a buyer
  • Since no one wants to overpay for a home they don’t even love

Factor in the intense competition and you’ve got a double whammy on your hands.

We’re talking inflating the listing price to make it a standard sale, then receiving multiple bids that often push the final sales price above the original ask.

In other words, today’s buyers are acquiring properties with the future home price appreciation already built in.

And that assumes prices actually do increase – it’s not a foregone conclusion, just a rosy expectation at the moment.

I’m also seeing a lot of the notoriously bad properties rear their ugly heads again. Many of these homes sat on the market for months without a single offer, but now they’re going into escrow in a matter of days.

Something is definitely wrong with this picture.  I don’t care how low mortgage rates are…

I’ll Wait for Another Dip

  • The housing recovery won’t feature home prices that go up in a straight line
  • Just like the downturn ebbed and flowed despite ultimately declining
  • There might be windows if you’re patient and keep an eye on things
  • But do expect home prices to keep on rising, and know that it’s okay to just hold off if you don’t find something you truly love

If I wanted to buy a home, I’d hang on and wait for the temporary madness to come to an end. There’s clearly a bubble mentality in the air again, with everyone and their mother bullish on housing.

Whenever that’s the case, it makes for a rather ominous situation. The increase in inventory involves a ton of previously underwater homes that no one wanted, even at lower prices. Or homes that were taken off market and abruptly thrown back on the MLS.

So why would you buy these same homes today at a significant premium? Because a magazine cover said, “Housing Is Back?”

The economy is still in tatters and things don’t exactly appear bright. If anything, a looming stock market crash seems to be on the horizon.

No, the sky isn’t falling, and housing is indeed on the mend after so many off years. But I do see the current cycle as an unsustainable period of growth that will likely unravel as the year goes on.

It’s going to be a bumpy road to recovery, not just a bottom followed by a surge back to new highs. We’ve seen this optimism in past years, only to watch the wheels fall off time and time again.

If you see something you love, go for it. If you’re worried about the missing the boom, you might want to sit down and reassess the situation.

Read more: Buying a home during a seller’s market.

Source: thetruthaboutmortgage.com

Apache is functioning normally

Apache is functioning normally

This article originally appeared on The Financially Independent Millennial and was republished here with permission.

If you’ve been paying attention to the housing market recently, you will have noticed it’s on fire. From Seattle, WA, to St. Petersburg, FL, there isn’t a market that hasn’t been affected by the low mortgage rates and high millennial demand for housing. The market hasn’t seen this much activity ever (even more so than the housing financial crisis of 2008).

Given the recent interest in home buying, we thought it would be prudent to discuss exactly how Americans can afford such large homes. And, why now?  After all these years, why are mortgages and refinances becoming popular all of a sudden? Let’s first discuss the basics of a mortgage and what its advantages are. They’re equally complex and beneficial, so it’s important to ensure we cover all the bases.

What Is a Mortgage Loan?

Simply put, your home secures the mortgage loan. It might be a house, a store, or even a piece of non-agricultural land. Banks and non-banking financial institutions both offer mortgage loans.

The lender gives the borrower cash, and charges them interest on it. Borrowers then pay back the loan in monthly installments that are convenient for them. Your property acts as security against the mortgage. And, your lender retains a charge until the borrower pays the loan in full. As a result, the lender will have a legal claim to the property for the duration of the loan. If the buyer fails to pay the debt, the lender has the power to seize the property and sell it at auction.

What Are the Different Types of Mortgage Loans? 

No matter what anyone tells you, always remember: A mortgage is a debt. Debt is a very polarizing topic to discuss with friends because many of us were raised on the premise that debt is bad. The truth is, some debt is bad, some debt is okay, and some debt is good. Many today would argue that mortgage debt is good since the rate is so low and it affords you a bigger home. 

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Some people believe that debt should be prevented at all costs. Others view it as a means of improving one’s quality of life or as a means of increasing fortune. What’s awful about debt, factually, is reckless credit usage.

Here’s a rundown of the many types of mortgage programs, along with their benefits and drawbacks, to help you determine which is best for you.

A mortgage with a fixed rate

The interest rate is fixed for the duration of the loan. These loans provide a consistent monthly payment and a low-interest rate. Borrowers who wish to pay off their mortgage quicker can typically make extra payments toward the principal, as prepayment penalties are uncommon.

Pro: It’s predictable because the monthly payment is fixed.

Con: Taking out a fixed-rate loan while the interest rates are high means you’re stuck with it for the duration of the loan. The only way out is to refinance at a lower rate.

A mortgage with an adjustable rate (ARM)

After a fixed-rate cycle of months to years, the interest rate on an adjustable-rate mortgage (ARM) varies. Lenders sometimes publish ARMs with a pair of numbers, such as 7/1 or 5/1. Usually, a 5/1 ARM has a fixed rate for five years and then adjusts every year, rounding off if that option exists.

Pro: An ARM’s opening interest rate is often lower than that of a standard fixed-rate loan, so it’s easy to get lured in by the teaser rate. But, it might wind up costing more in interest over the term of your mortgage than a fixed-rate loan. An ARM may be the ideal option for someone who plans to market their home before the rate changes.

Con: Future rate hikes might be significant, leaving many adjustable-rate mortgage borrowers with significantly elevated monthly payments than if they chose a fixed-rate mortgage.

Refinance loan or second mortgage

Sometimes, a homeowner already has a mortgage but wants to change the terms. Maybe they want a lower rate or a longer term. Or maybe, they want to take out more equity from their home. Whatever the case, many options are available! The most common would be refinancing the home mortgage. With mortgage refinance, the homeowner closes out their original mortgage, and obtains another one – ideally with more favorable terms. 

With interest rates so low these past couple of years, refinancing has become much more popular. How often a homeowner refinances is usually a personal decision, but they should consider at least these factors:

  • market interest rate vs their current mortgage interest rate
  • length/term of their loan vs the new one they want to get
  • cost of the loan (“closing costs”) vs keeping still
  • [cash-out refinance only] what to do with the funds

Pros: If you can secure a lower interest rate than your current loan, and the closing costs aren’t significant, then it could definitely be worth refinancing. On the other hand, if you need the money for home renovations, a cash-out refinance may be your best bet.

Cons: Refinancing costs money, so make sure the math works in your favor. 

Conventional loan

The standards for conventional loans are generally more stringent than those for government-backed house loans. When reviewing traditional loan applications, lenders usually look at credit history and debt-to-income ratios.

Pro: A conventional mortgage may be used for a range of property kinds, and PMI would help borrowers qualify for a conventional loan even if they have less than 20% for the down payment.

Con: Compared to government loans, conventional loans have tougher qualification standards and may demand a larger down payment.

Interest-only mortgage

The average age of home purchases has decreased, and an increasing number of millennials are now purchasing their first houses. Typically, the loan duration is determined by the debt-to-income (DTI) ratio and the sum of interest negotiated on the mortgage. For homebuyers, a longer contract means a lower payment, but a longer time to pay off that debt.

Some lenders may offer an interest-only mortgage, meaning the borrower’s monthly fees will cover only the interest. As a result, it’s best to have a strategy in place to ensure that you can have enough money to return the entire sum borrowed at the end of the period.

Interest-only loans may be appealing since your monthly payments are low. But, unless you have a strong strategy to reimburse the capital, at some point, a fixed loan could be the better option.

Pro: Interest-only mortgages allow the borrower to place their capital elsewhere, such as in dividend stocks, a rental property, or other investments. 

Con: Borrowers who aren’t careful with their budget may find themselves never being able to pay off the loan.

Read more: 15 Ways to Generate Passive Income from Real Estate

FHA loan

FHA loans and VA loans are mortgage loans insured by the government and available for potential homebuyers. FHA loans are available to lower-income borrowers and typically require a very low down payment. Also, borrowers get competitive interest rates and loan costs. 

The government does not directly grant Federal Housing Administration (FHA) loans. FHA loans can be issued by participating lenders, and the FHA guarantees the loans. FHA mortgages might be a viable option for those who have a high debt-to-income ratio or a bad credit score.

Pro: FHA loans need a smaller down payment and credit score requirements are lower than conventional loans. Moreover, FHA loans may enable applicants to use a non-resident co-signer to assist them to be qualified.

Con: Unless a borrower puts down 10%, the monthly mortgage insurance will remain a part of the payment for the loan’s life. If a borrower ever wants to remove the monthly mortgage insurance, they must qualify and refinance into a conventional loan.

Read more: How to Improve Your Credit Score

FHA 203(k) loan

An FHA 203(k) loan is a government-insured mortgage allowing funding borrowers with one loan for both home renovation and house purchase. Current homeowners may also be eligible for an FHA 203(k) loan to help pay for the repairs of their current house.

Pro: An FHA 203(k) loan can be utilized to purchase and renovate a home that would otherwise be ineligible for a traditional FHA loan. It just takes a 3.5% down payment.

Con: You must be eligible for the full property value, as well as the price of anticipated improvements, with these loans. The rate may be greater than on a normal FHA loan. You’ll also have to pay both a one-time, and monthly mortgage premium insurance payments.

VA (Veterans Affairs) loan

Home loans for veterans, reservists, and military or National Guard members, as well as qualified surviving married partners, are backed by the US Department of Veteran Affairs. 

In fact, nearly 90% of all VA-backed home loans are made without a down payment.

Pro: You won’t have to put any money down, or deal with PMI payments every month.

Con: On purchase loans, a one-time VA “funding charge” varies from 1.4% to 3.6%.

Fannie Mae homestyle loan

The Fannie Mae homestyle mortgage needs just 3%–5% down, but a credit score of 620 is an option for fixer-uppers.

Pro: You don’t have to pay for mortgage insurance beforehand, and you can terminate it after twelve years or when you have 20% equity on your house. The rate is frequently cheaper than an FHA 203(k) loan.

Con: Credit score requirements must be met.

Reverse mortgage loan

Homeowners aged 62 and above can use a reverse mortgage to convert some of their property value into cash. The age of the youngest homeowner, the loan rate and fees, the heir’s wishes, and payout type are all aspects for the lender to consider.

Pro: There are no monthly payments required, and the homeowner can select between a one-time balloon payout, a monthly payout, a line of credit, or a combination of the three.

Con: The interest rate may be greater than that of a typical mortgage. Mortgage insurance, a direct charge, an initiation fee, and third-party expenses are usually paid by the homeowner.

Final Thoughts

Mortgage loans are given to those who have enough income and assets vs. their debt. Mortgages also aid in the development of credit. They enable homeowners to invest in a home, with the advantage of having a forced-savings component. However, like with any loan, borrowers should be responsible when taking out a mortgage. It’s easy to get carried away and buy more than is necessary (and become house-poor).

Source: credit.com

Apache is functioning normally

Apache is functioning normally

There’s been plenty to be happy about in housing lately. Home prices seem to have bottomed, and there is talk about double-digit appreciation over the next five years.

Mortgage delinquencies continue to march lower and distressed inventories keep shrinking.

Additionally, purchase mortgage applications increased to the highest level since May of 2010, per the Mortgage Bankers Association.

However, as I noted in a recent post, all this “good news” has made it less attractive to buy a house at the moment, despite the low rates and reduced home prices.

Why? Well, for one, sellers are upping their asking price, and many of the homes that festered on the market for months are appearing again. The scary part is that this time they’ll probably sell, and at a premium!

Top Mortgage Lender Not Enthused

I’m not the only one that feels this way. The top mortgage lender in the United States, Wells Fargo, seems to think the recent run up in home prices isn’t sustainable.

In fact, economists at the San Francisco-based bank and lender noted in a special commentary that the housing market is experiencing a “bubble within a bust.”

What they mean is that there is a “temporary spike in home prices,” which will pop once conditions deteriorate.

In other words, it’s not going to be a straight line onward and upward – there will be plenty of ups and downs as the market attempts to find its “new normal.”

And there are already signs of a slowdown, with unemployment festering, economic activity cooling, and the spring home selling season off to what they call a “mediocre start.”

Additionally, homebuilder confidence took a turn for the worse recently thanks to higher construction costs, along with a shortage of developed lots and skilled workers.

On top of that, the economists believe investors will stop converting single-family homes to rentals once interest rates increase, as the returns offered for such ventures will diminish.

There’s also fear that higher mortgage rates will slow home price appreciation. Though higher rates could also push more would-be buyers to pull the trigger…

Housing Recovery Still on Track

While the headline and opening paragraph of the economists’ commentary seemed bleak, the underlying message is positive.

They still believe housing is on track to make a recovery, just at a more modest and reasonable pace. Darn.

We can’t simply erase the housing crisis in five years – it takes time to right the many wrongs that occurred, especially when we’re using artificially low mortgage rates as the solve-all.

Yes, you can snag a low mortgage payment thanks to those low rates, but don’t expect your home to double in value anytime soon.

Put simply, we got a little ahead of ourselves, as we often do with just about everything.

This is the bubble mentality in a nutshell – everyone believes at the same exact time that something is destined for greatness.

And then the crash comes…

Be Reasonable About Your Home Purchase

What this all means is that you should be prudent in your decision to purchase a home, as always.

First and foremost, a home is a shelter, not an investment. Regardless of that fact, there are still good times to buy, and bad times to buy.

If you have flexibility, it may be wise to wait it out a little longer. At the moment, the inventory is poor at best, and the competition is fierce.

As noted earlier in the post, lots of dodgy homes are making their way back to market, and the worry here is that overzealous home buyers will overlook the reasons the properties didn’t sell the first time around.

Don’t be one of those people who makes the decision to purchase a home for the sole reason that it’s the greatest time in history to buy.

That mentality often leads to disappointment once the enthusiasm wanes. Yes, housing is on the road to recovery, but don’t buy all the hype.

Source: thetruthaboutmortgage.com

Apache is functioning normally

Apache is functioning normally

At last glance, 30-year fixed mortgage rates were sitting above 7%. Despite this, there are virtually no homes for sale.

One would assume that after such a massive interest rate spike, demand would flounder and supply would flood the market.

Yet here we are, looking at a housing market that has barely any for-sale inventory available.

And when you remove the new home inventory (from home builders) from the equation, it’s even worse.

Let’s explore what’s going on and what it might take to see listings return to the market.

Why There Are No Homes for Sale Right Now?

The housing market is highly unusual at the moment, and has been for quite some time.

In fact, since the pandemic it’s never really been normal. The housing market came to a halt in early 2020 as the world stopped, but then took off like a rocket.

If you recall, the 30-year fixed spent the entire second half of 2020 in the sub-3% range, fueling voracious demand from buyers.

And as Zillow pointed out, the age demographics had already lined up nicely for a surge of demand anyway.

Around that time, some 45 million Americans were expected to hit the typical first-time home buyer age of 34.

When you combined the demographics, the record low mortgage rates, a pandemic (which allowed for increased mobility), and already limited inventory, it didn’t take much to create a frenzy.

At the same time, you had existing homeowners buying up second homes on the cheap, due to those low rates and generous underwriting guidelines.

And let’s not forget investors, who were taking advantage of the very accommodative interest rate environment and the insatiable demand from buyers.

The rise of Airbnb and short-term rentals (STRs) coincided with this low-rate environment, potentially taking additional inventory off the market.

This quickly depleted supply, which was already trending down thanks to a lack of new home building after the prior mortgage crisis.

Home builders got burned in the early 2000s as foreclosures and short sales spiked and prices plummeted. And their excess supply sat on the market.

As a result, they developed cold feet and didn’t build enough in subsequent years to keep up with the growing housing needs of Americans.

Collectively, all of these events led to the massive housing supply shortage.

Low Mortgage Rates Got Buyers in the Door, But Will They Ever Leave?

Low supply aside, another unique issue affecting housing supply is a concept known as mortgage rate lock-in.

In short, there’s an argument that today’s homeowners have such low mortgage rates that they won’t sell. Or can’t sell.

Either they don’t want to give up their low mortgage rate simply because it’s so cheap. Or they are unable to afford a home purchase at today’s rates and prices.

Simply put, most can’t trade in a 3% rate for a 7% rate and purchase a home that’s probably more expensive than theirs was a few years earlier.

And this isn’t some tiny subset of the population. Per Freddie Mac, nearly two-thirds of all mortgages have an interest rate below 4%.

And nearly a quarter have a mortgage rate below 3%. How on earth will these folks sell and buy a replacement home if prices haven’t come down, but have in fact risen?

The answer is most will not budge, and will continue to enjoy their low, fixed-rate mortgage for many years to come.

This further explains why inventory is so tight and not really improving, despite the Fed’s attack on housing demand via 11 rate hikes.

[Why are home prices not dropping?]

Housing Supply Is at an All-Time Low

Redfin reported that the total number of homes for sale hit a record low in August.

Active listings were down 1.1% month-over-month on a seasonally adjusted basis, and a whopping 20.8% year-over-year.

That’s the biggest annual decrease since June 2021. However, new listings have ticked higher the past two months on a seasonally adjusted basis.

In August, new listings increased 0.8% from a month earlier after increasing the month before that.

But due to nearly a year’s worth of monthly declines prior to that, new listings were still off a big 14.4% year-over-year.

This meant months of supply stood at just two months, well below the 4-5 months usually considered healthy.

Redfin Economics Research Lead Chen Zhao noted that “new listings have likely bottomed out,” arguing that those who are locked in by low rates have already decided not to sell.

That leaves those who must sell their property, due to stuff like divorce or a change in work-from-home policy.

Interestingly, even some WFH homeowners are moving back closer to work, but keeping their homes because they can rent them out.

Because homeowners got in so cheap, it’s not out of the question to keep the old house and go rent or buy another property.

All of this has created a huge dearth of existing home supply, but there is one winner out there.

Home Builders Are Gaining a Ton of Market Share

While existing homes, also known as previously-owned or used homes, are hard to come by, newly-built homes are somewhat plentiful.

In fact, newly built single-family homes for sale were up 4.5% year-over-year in June, per Redfin, while existing homes for sale were down 18%.

And roughly one-third of homes for sale were new builds, up markedly from prior years and well above the norm that might be closer to 10%.

Astonishingly, new homes accounted for more than half (52%) of single-family homes for sale in El Paso, Texas.

Similar market share could be seen in Omaha (46%), Raleigh (42.1%), Oklahoma City (39%), and Boise (38%).

Meanwhile, the National Association of Realtors (NAR) predicts that new home sales will increase 12.3% this year, and 13.9% in 2024.

As for why home builders are seeing a big increase in market share, it’s mostly due to a lack of competition from existing home sellers.

In short, they’re the only game in town, and they don’t need to worry about finding a replacement property if they sell (like existing homeowners)

Additionally, they’re able to tack on huge incentives such as rate buydowns, including temporary and permanent ones, along with lender credits.

This allows them to sell at higher prices but make the monthly payment more palatable for the buyer.

Perhaps more importantly, it allows buyers to still qualify for a mortgage at today’s sky-high prices.

When Will More Homes Hit the Market?

For now, this new reality is expected to be the status quo. After all, those with so-called golden handcuffs have 30-year fixed-rate mortgages.

That means they can continue to take advantage of their dirt-cheap mortgage for the next few decades.

This includes second home owners and investors, who got in cheap when prices were much lower and mortgage rates were also on sale.

Meanwhile, the home builders don’t seem to be going nuts with supply, and even if they ramped up production, it wouldn’t satisfy the market.

Remember, existing home sales typically account for around 85-90% of sales, so builders won’t come close to satisfying demand.

The only real way we get a big influx of supply is via distress, sadly. That could be the result of a bad recession with mass unemployment.

And it could be triggered by the 11 Fed rate hikes already in the books, coupled with a lack of new stimulus and the resumption of things like student loan payments.

Compounding that is sticky inflation, which has made everything more expensive and is quickly depleting the savings accounts of Americans.

But even then, you could argue that a mass loan modification program would be unveiled to at least keep owner-occupied households in their properties.

Considering how cheap their housing payments are, assuming they’ve got a low fixed-rate mortgage, it’d be hard to find them a cheaper alternative, even if renting.

In the early 2000s this wasn’t the case because the typical homeowner held a toxic mortgage, such as an option ARM or an interest-only loan. And many weren’t even properly qualified to begin with.

Read more: Today’s Housing Market Risk Factors: Is Real Estate in Trouble?

Source: thetruthaboutmortgage.com

Apache is functioning normally

Apache is functioning normally

What a difference a few years make. Back in 2007 and 2008, lenders were still willing to hand out high-risk mortgages, such as those with limited documentation or no money down (or both).

And they did so at a time when home prices were peaking in many parts of the country, which clearly made for a nasty outcome.

But once the mortgage crisis struck, underwriting guidelines tightened significantly, allowing only the most creditworthy borrowers to take out mortgages.

The evidence of that is now clear, thanks a new analysis from credit bureau TransUnion.

Earlier this month, the company noted that the Q1 2013 mortgage delinquency rate (60 or more days past due) fell 12% from the fourth quarter, and 21% year over year. That pushed the delinquency rate to 4.56%, which is still double the pre-crisis normal.

While this may have raised some eyebrows, seeing that credit card and auto loan delinquencies are around record lows, one needs to realize that it takes time to work things out.

Most of the Bad Mortgages Aren’t New

If you look at the chart above, you’ll notice that older vintages of mortgages have performed much worse than those originated over the past few years.

TransUnion noted that mortgages taken out before 2009 account for 50% of all outstanding mortgages, but 86% of the delinquencies.

And if you look at 2007 vintages in particular, you’ll notice that more than 20% have been delinquent at some time since origination, which is clearly awful.

Conversely, only 2.5% of mortgages made in 2010 have fallen into default over the past three years.

If we look at the 2011 and 2012 numbers, the trend only seems to be getting better, with very few delinquencies on newer vintages.

Additionally, the number of new delinquencies in the older vintages seems to be slowing down, as those who have ridden out the storm may have gotten through the worst of it.

And it if weren’t for the extremely long foreclosure timelines, TransUnion said the mortgage delinquency rate would have peaked in 2009 at about 3.05%, instead of 6.89%.

Meanwhile, the delinquency rate would stand at just 1.68% today, a number deemed “normal.”

The Mortgage Future Looks Bright

In other words, once that festering pool of bad mortgages finally works its way through the system, the residential mortgage market should be pretty pristine.

The big question now is determining the right level of underwriting to ensure those who should be able to obtain mortgages can, while also avoiding another crisis.

It gets a little murky if you look at the old numbers because home prices plummeted after many of those so-called bad mortgages were originated.

But what if prices hadn’t fallen so dramatically? Would many of those mortgages be current, or would the borrowers have been able to refinance again or sell their homes at a profit?

I’m sure plenty of high-quality mortgages went into (strategic) default thanks to the home price drop alone, though at the same time, the prevalence of option arms and other subprime offerings didn’t help matters.

Today’s mortgage quality is also skewed, albeit in a completely different direction – thanks to the ultra low mortgage rates available, it is much easier for borrowers to keep up with payments.

However, we all know mortgage rates will climb in the not-so-distant future, and so banks and lenders must be careful not to take on too much risk prematurely.

As both rates and home prices rise, mortgage payments will become less affordable, and that could usher in a new era of dodgy mortgage products to increase affordability.

We should be extremely careful not to allow that to happen again, especially when the mortgage pool finally looks so unspoiled.

Read more: Will high quality mortgages prevent another bubble?

Source: thetruthaboutmortgage.com

Apache is functioning normally

In mid-2013, the FHA implemented a major change to its loan program that requires the annual mortgage insurance to be paid for the life of the loan if the loan-to-value ratio (LTV) exceeds 90%.

FHA Loans Got Pricey Overnight

  • A newly imposed rule means most FHA borrowers
  • Will be forced to pay mortgage insurance for the full loan term
  • Which can greatly increase the total cost of the loan
  • And make it an unattractive home loan option relative to conventional offerings

This is a very significant change, seeing that many borrowers turn to the FHA because they don’t have access to a large down payment.

Prior to this underwriting change, borrowers generally only had to pay monthly mortgage insurance until the loan amortized to 78% LTV.

And in some cases, the annual mortgage insurance premium wasn’t required at all, just the upfront mortgage insurance premium.

I touched upon this earlier, but the changes are now live. You can see the charts here, which detail the mortgage insurance premiums based on loan term and LTV.

To add insult to injury, the annual insurance premium on FHA loans was also increased back in April. So essentially today’s FHA borrowers are actually being hit twice.

Note: Those who qualify for an FHA streamline refinance (for loans originated prior to June 1, 2009) only have to pay a 0.55% annual MIP thanks to an Obama administration initiative.

If you’re wondering why the FHA made these changes, it was to shore up capital and protect the agency from mounting defaults, and perhaps to level the playing field and draw in private capital.

[Why private mortgage insurance stocks are rising.]

Before this policy change, the FHA was insuring loans out of its own pocket, even if the borrower was no longer paying mortgage insurance premiums.

A Look at the Potential Cost of the Policy Change

In a nutshell, this basically means FHA loans are a lot less attractive than they used to be compared to conventional mortgages.

Before this change went into effect, FHA loans were a hot commodity because they had relatively easy underwriting guidelines coupled with low mortgage rates.

Now, even if the mortgage rate on an FHA loan is significantly lower than that of a conventional loan, the mortgage insurance premiums alone can trump the interest rate savings.

For example, check out the promotional chart from United Guaranty above, one of the largest private mortgage insurers (that competes head-to-head with the FHA).

FHA Loans Will Cost $40,000 More?

  • While mortgage insurance for life means
  • Homeowners will pay a lot more in premiums
  • The assumption is the loan will be held to maturity
  • In reality most home loans are only kept for a fraction of the 30-year term

Their scenario, which is a 30-year fixed, $200,000 loan amount at 96.5% LTV for the FHA loan, and 95% for their loan, equates to an FHA loan that is about $40,000 more expensive.

The conventional mortgage only requires payment of private mortgage insurance (PMI) for roughly 10 years, while the FHA loan requires it for the full 30 years.

And if you notice the mortgage rates involved, the FHA loan is priced at 3.25%, while the conventional loan with PMI is priced at 3.75%.

The FHA loan results in less interest paid throughout the life of the loan, but costs the borrower big time in the mortgage insurance department.

Now, United Guaranty might have put together a favorable scenario, but even so, the graph illustrates the importance of looking at the big picture.

You can’t just shop for mortgage rates by interest rate alone – one-time fees and other costs can change the picture completely.

The graph also strengthens the argument of coming in with at least 20% down when purchasing a home or refinancing.

If you are able to come up with such a down payment, you can avoid mortgage insurance on the conventional loan entirely, grab a lower mortgage rate, and enjoy a lower monthly mortgage payment.

At the same time, the mortgage insurance costs in this graph may be blown out of proportion.

Most borrowers only hold their mortgages for six years or so, meaning the full cost of the mortgage insurance isn’t actually realized in most cases.

Still, be sure to compare and contrast the costs of all types of loans to ensure you get the best deal for your particular situation.

Read more: The differences between FHA and conventional mortgages.

Source: thetruthaboutmortgage.com

Apache is functioning normally

Buyers facing high mortgage rates are pulling out of their home-purchase agreements at the highest rate in nearly a year.

Nearly 60,000 home-purchase agreements were canceled nationwide in August, equal to 15.7% of homes that went under contract that month, according to a new report from Redfin.

That rate is up from 14.3% in August 2022 and marks the highest percentage since October 2022, when mortgage rates surpassed 7% for the first time in two decades.

The average interest rate on a 30-year-fixed mortgage was 7.07% in August. Rates last month surged to 7.23%—the highest since 2001 – sending the typical homebuyer’s monthly payment up significantly from last year.

“I’ve seen more homebuyers cancel deals in the last six months than I’ve seen at any point during my 24 years of working in real estate. They’re getting cold feet,” said Jaime Moore, a Redfin Premier real estate agent in Reno, Nevada.

“Buyers get sticker shock when they see their high rate on paper alongside extra expenses for maintenance, repairs and closing costs. Many of them would rather back out, even if it means losing their earnest money. A lot of sellers are also willing to let buyers slip away because they don’t want to concede to repair requests,” Morre said.

Home prices not expected to fall 

Home prices are high due to competition among buyers for limited inventory in the market.

The median U.S. home sale price rose 3% year over year to $420,846 in August, the largest annual increase since October 2022. 

This price was 2.8% below the May 2022 record of $432,780, and is expected to remain elevated for the foreseeable future.

“The Federal Reserve still has more work to do in its battle against inflation, which means mortgage rates are unlikely to come down anytime soon. As long as rates remain high, homeowners will be reluctant to sell,” Chen Zhao, Redfin economics research lead, said, noting that a lack of homes for sale will keep prices high because it means buyers are competing for limited home supply.

Buyer demand Is below pre-pandemic levels, but no longer in freefall

Pending sales declined 0.6% on a seasonally-adjusted basis to 381,192 in August from the previous month. Compared from a year earlier, pending sales dropped 18.1%. 

This figure has been hovering below 400,000 since the end of 2022, compared with nearly 500,000 just before the pandemic.

Pending sales have stabilized as the initial shock of elevated mortgage rates moves further into the rearview mirror, but high housing costs are still keeping many buyers on the sidelines, according to Redfin. 

New Listings Tick Up Slightly, But Overall Housing Supply Remains at Record Low

New listings rose 0.8% to 474,239 in August on a seasonally-adjusted basis from July.

It’s the second small uptick on a seasonally-adjusted basis following nearly a year’s worth of declines. Year-over-year new listings were down 14.4%. Most homeowners who feel handcuffed by high rates have already made the decision not to sell, said Zhao.

“New listings have likely bottomed out,” she said. “Many of today’s sellers are putting their homes on the market because they have to, in some cases due to divorce, family emergencies or return-to-office policies.”

Still, the total number of homes for sale hit a record low of 1.3 million in August, falling 1.1% month over month on a seasonally adjusted basis and 20.8% year over year, the largest annual decline since June 2021.

Housing supply is at an all-time low because homeowners feel locked into their low mortgage rates. For many, selling their home and buying a new one would mean taking on a much higher monthly payment, Redfin said.

Source: housingwire.com

Apache is functioning normally

How fast is fast enough? Ask Guaranteed Rate, which just launched “5 Minute Approval” for mortgage applications.

This new “innovation” from the Chicago-based mortgage lender allows borrowers to get approved for a home loan in just five minutes.

Interestingly, it comes not long after their Same Day Mortgage, which apparently wasn’t quick enough for some.

It might also be a sign of the times, with mortgage application volume at its lowest levels since the 1990s.

As the name suggests, customers can get approved for a home loan in as little as five minutes and possibly close in just 10 days.

How Does This New 5 Minute Mortgage Approval Work?

Those who are in a really big rush to get a mortgage can now take advantage of Guaranteed Rate’s so-called 5 Minute Approval.

As noted, the company only just launched Same Day Mortgage back in March, but apparently they had their sights set on faster.

And faster is exactly what this is. How it works appears relatively simple.

You visit their website, access the secure portal, sign the initial application package, then upload any requested documents.

This can apparently be done without any human interaction as well, and is about three minutes faster than Rocket Mortgage’s 8-minute full approval launched back in 2015.

To date, Guaranteed Rate has “successfully approved” more than 100 loans within 5 minutes via their pilot program.

It’s unclear how much is needed from the borrower as they didn’t provide the details, but that obviously seems lightning fast.

Also not totally clear if this is a full loan approval or a more basic mortgage pre-approval.

Simply visiting a website and filling out a form can easily take five minutes, so my assumption is they aren’t asking for much here. It’s unclear if credit is pulled, but I’d guess at least a soft pull is required.

If document upload is needed, that would likely take several minutes to track down from other websites.

Perhaps they allow applicants to link bank accounts, pay stubs, and other key information to speed up this process.

Either way, only a cookie-cutter vanilla loan scenario is going to get a mortgage approval in as little as five minutes.

This means a W-2 borrower with good credit and nothing out of the ordinary. And perhaps really fast fingers and a fiber internet connection to make it through the application in record time.

Jokes aside, it’s available for both home purchases and mortgage refinances, assuming you’re the impatient type. Okay, I guess one more joke.

Guaranteed Rate President and CEO Victor Ciardelli notes that you can even be touring a house and generate the insanely fast approval while you’re walking around.

Is Speed Still Necessary in Today’s Cooler Housing Market?

While it feels like a distant memory, there used to be a waiting list to refinance a mortgage at certain banks.

And many loans took two months or longer to close, due to unprecedented demand related to record low mortgage rates.

Several years ago, just getting an underwriting decision could take a couple weeks.

Not so today, with mortgage application volume down to 1996 levels, per the latest report from the Mortgage Bankers Association (MBA).

But despite depressed levels of demand, there are still bidding wars and multiple offers on many home sales because inventory is also rock-bottom.

At last glance, months’ supply was hovering around three months, which is well below a healthy market at 4-5 months of supply or more.

So it’s not just low demand, it’s also a story of very limited supply.

Guaranteed Rate cited Zillow data that found 48% of homes for sale still receive three or more offers.

This means it can still pay to have a mortgage approval in-hand if and when you tour a property.

Of course, a same day approval vs. five minute approval might just be splitting hairs.

Perhaps more importantly, Guaranteed Rate says applicants can close on their home loan in as little as 10 days.

Getting to the finish line that quickly seems a lot more valuable than rushing through an approval at the start.

Read more: Guaranteed Rate’s OneDown Offers a 1% Mortgage and $1,000 Toward Lender Fees

(photo: Steve Austin)

Source: thetruthaboutmortgage.com