Mark Fleming

Apache is functioning normally

Existing home sales have declined approximately 30% since mortgage rates started rising in the fall of 2021, according to First American’s Potential Home Sales Model for June 2023. But home sales may have now reached their bottom and are ready to settle at a new normal somewhere between the breakneck pace of 2020 and 2021 and the low pace of earlier this year, according to Mark Fleming, chief economist at First American.

First American’s model measures what a healthy market level of home sales should be, based on economic, demographic and housing market fundamentals.

In June, potential existing-home sales decreased to a 5.31 million seasonally adjusted annualized rate (SAAR), a 0.23% month-over-month decrease. The market potential for existing-home sales decreased 2.8% compared with a year ago, a loss of 152,400 (SAAR) sales.

The current housing market is unique because more than 90% of homeowners in the U.S. have locked in a mortgage rate below 6%, noted Fleming.

“As mortgage rates return to a not-so-new-normal of over 6%, those homeowners have a financial disincentive from selling, keeping a lid on the primary source of housing supply, and you can’t buy what’s not for sale,” Fleming said.

“The good news is that home sales have likely already bottomed, and the pace of sales will begin to settle into a new normal below the breakneck pace of 2020 and 2021, but also not as low as earlier this year. The hope is that affordability will improve in the second half of 2023, so that the pace of sales can be not too hot, not too cold, but just right.”

First American said its potential home sales model measures existing-homes sales, which include single-family homes, townhomes, condominiums and co-ops on a seasonally adjusted annualized rate based on the historical relationship between existing-home sales and U.S. population demographic data, homeowner tenure, house-buying power in the U.S. economy, price trends in the U.S. housing market and conditions in the financial market.

Source: housingwire.com

Apache is functioning normally

In a new report from First American, Chief Economist Mark Fleming reveals that two of the three key drivers of the Real House Price Index (RHPI), nominal house prices and mortgage rates, dragged affordability lower in June. The 30-year, fixed mortgage rate increased by 0.3 percentage points and nominal house prices accelerated by 0.8% compared with May.

The Three Key Drivers of the RHPI:

  1. Median Household Income is one of the fundamental factors determining the amount of housing a particular consumer can afford. incomes can be tracked over time to demonstrate how rising/falling incomes impact consumer house-buying power.
  2. Interest rates drive how much a home buyer can leverage their median household income to purchase more or less housing. As interest rates fall, consumers are able to purchase a more expensive house due to lower borrowing costs. The opposite is true for rising rates.
  3. House price levels are measured using a weighted repeat-sales house price index that tracks how prices of single-family residential properties rise and fall over time and across numerous geographies.

While household income increased by 0.4%, it was not enough to offset the affordability-dampening impact from higher mortgage rates and prices. Consumer house-buying power declined by nearly $9,000 compared with May and remains $32,000 lower than one year ago. Fleming predicts the outlook for house-buying power to be heavily dependent on the path for mortgage rates, and that path is highly uncertain.

“It’s likely that mortgage rates continue to hover in the 6.5-to-7.5% range for the remainder of the year, which means affordability will remain a challenge for many homebuyers,” said Fleming.

How High Will Mortgage Rates Go?

The RHPI can be referenced to model shifts in income and mortgage rates to see how they impact consumer house-buying power or affordability. Rising incomes and falling mortgage rates each boost house-buying power, while falling incomes and rising mortgage rates each sap house-buying power.

As of mid-August, the average mortgage rate nationally sits at approximately 7%. In June of last year, the average mortgage rate nationally was roughly 5.5%. Holding incomes constant at their June 2023 level and assuming a 5% down payment, the increase in mortgage rates alone reduced house-buying power by nearly $57,000.

An average of several industry forecasts projects that mortgage rates will end the year lower, at 6.1%. If those forecasts are correct and the average mortgage rate decreases from the 7% level to 6.1%, house-buying power increases by nearly $32,000. However, if mortgage rates drifted upward to 7.5%, house-buying power would fall by an estimated $16,000.

Uncertain Outlook for Mortgage Rates

The 30-year fixed mortgage rate is loosely benchmarked to the 10-year Treasury bond. Since the end of the Great Recession, the 30-year fixed mortgage rate has on average remained 1.7 percentage points (170 basis points) higher than the 10-year Treasury bond yield. The spread usually widens during periods of economic or geopolitical uncertainty, as is the case in today’s market.

As the industry forecasts predict, it’s reasonable to assume that the spread and, therefore, mortgage rates will moderate later in the year if the Federal Reserve stops further monetary tightening and provides investors with more certainty. However, it’s unlikely that mortgage rates will revert to the 5.5% levels of 2022 until inflation has moved closer to the Federal Reserve’s 2% target and it begins loosening monetary policy, or there’s a significant economic downturn.

To read the full RHPI, click here.

Source: themreport.com

Apache is functioning normally

U.S. Census Bureau data published this week shows that the homeownership rate fell slightly to 64.1%, despite the fact that the number of new households is rising. That’s because most new household formations come from rentals, the number of which was larger than the amount of new homeowners for the first time since 2016.

“The housing shortage, especially at the level of moderately priced homes, has prevented financially capable renters from owning,” Lawrence Yun, chief economist of the National Association of Realtors, said in a statement about the latest homeownership rate numbers. “More home construction is needed to relieve the housing shortage and allow more Americans to participate in the wealth gains associated with ownership.”

Mark Fleming, chief economist of First American, said in another report this month that the homeownership rate is below what it should be at present. In 2018, he said the homeownership rate was underperforming potential demand by 8.7%, mainly due to the lifestyle choices of young adults.

The problem is that millennials are trailing previous generations when it comes to homeownership. Many are choosing to delay getting married and having kids, which are often the main triggers for buying a home. As such, Fleming said there’s a six percentage point difference between millennials and members of Generation X at 30-years old.

“But the bulk of millennials have yet to turn 30, which signals higher potential homeownership demand may be on the horizon,” he said.

The largest number of millennials by birth year will turn 30 in 2020, which is the prime age for buying a home, Fleming said. Even better, many are well prepared to make the step up to homeownership, he added. For example, millennials are the most educated generation, and have the highest incomes compared to older generations at the same age. The inflation-adjusted income for 37 year old millennials is $77,000, compared to $72,000 for Generation X and $69,000 for baby boomers.

As such, Fleming believes the homeownership rate could well grow in the coming years.

“Higher income leads to higher house-buying power,” Fleming said. “Coupled with today’s 3.8 percent 30-year fixed-rate mortgage, 37-year-old millennials can afford $35,000 more home than Generation X and $52,000 more home than baby boomers at the same age. We expect the homeownership rate to further close the gap with potential in the years ahead as millennials continue to make important decisions, such as attaining an education and, later in life, getting married and having children.”

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]
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Source: realtybiznews.com

Apache is functioning normally

Homebuyers didn’t get any relief in mortgage rates this week, leaving them with little choice to either move forward with their purchase plans at elevated rates or stick to the sidelines.

The rate on the 30-year fixed mortgage edged higher to 6.71% from 6.67% the week prior, according to Freddie Mac. Rates have swayed between 6% and 7% since the start of the year, showing little signs of softening this summer.

The high rates have kept many homeowners from listing their homes, driving up prices on what’s left in the market and creating unfavorable conditions for the buyers still on the hunt.

“That move-up buyer is pretty much gone,” Luis Padilla, CEO of Oceanside Realty and Padilla Team in Miami, told Yahoo Finance. “It’s what’s putting the brakes on the market and inventory.”

Rate-trapped homeowners stall inventory growth

The latest data showing homes that went into contract in May underscores the inventory challenges.

Pending home sales, a leading indicator of the housing market’s health, dropped 2.7% in May from the previous month, much more than what was expected. That’s largely because buyers couldn’t find enough homes to make a deal, NAR chief economist Lawrence Yun said, noting that each listing received three offers on average.

The shortages have persisted. There were 459,000 single-family homes on the market for the week ending June 26, according to Altos Research. While up 1.9% from a week prior, that’s 10% fewer homes compared with a year ago.

“Normally by mid June you’d have 10-20% more homes on the market than over the holidays,” Mike Simonsen, CEO of Altos Research, wrote in his blog. “But this year we have fewer.”

Chad Wootton looks at the listings of homes for sale while talking on the phone in Los Angeles. (Jae C. Hong, AP Photo)

The biggest reason for the dearth of properties is reluctance from homeowners, most of whom have a much lower mortgage rate than the prevailing rate.

“That move buyer doesn’t want to give up that 3% mortgage rate,” Padilla said. “They would rather commute 30 minutes to work than pay hundreds more on a monthly mortgage payment.”

Buyers move on to new homes

So what’s a homebuyer to do? Many of them who are still in the market are looking at new builds.

That was one factor that pushed the volume of mortgage applications for purchases up 3% for the week ending June 23, according to the Mortgage Bankers Association (MBA). That’s the third week of increases and the highest level of activity since early May.

“New homes sales have been driving purchase activity in recent months as buyers look for options beyond the existing-home market,” MBA Deputy Chief Economist Joel Kan said in a statement. “Existing-home sales continued to be held back by a lack of for-sale inventory as many potential sellers are holding on to their lower-rate mortgages.”

A Beazer home is shown under construction in Gilbert, Ariz. (Matt York, AP Photo)

Though new inventory offers a glimmer of hope, very few homes that are available are affordable to entry-level buyers.

Padilla noted that while the share of active listings had increased 19.5% in May in the Miami-Dade area, the average cost of a single-family home was $620,000, up 7.8% from a year prior. Prices for condos increased 6.5% to $415,000.

That tracks with national data this week showing prices have increased for three months in a row, making conditions worse for buyers out there.

“This is good news for homeowners gaining more equity,” Mark Fleming, First American’s chief economist, previously told Yahoo Finance. “But it will pressure affordability for the potential first-time homebuyer.”

Gabriella is a personal finance reporter at Yahoo Finance. Follow her on Twitter @__gabriellacruz.

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Source: finance.yahoo.com

Apache is functioning normally

Apache is functioning normally

Let’s talk about home prices again because there have been numerous reports of eroding affordability and fears that we might be topping out just five short years after hitting rock bottom.

For example, the National Association of Realtors recently noted that the median existing-home price in February was up 7.7% to $228,400 from a year earlier (February 2016: $212,100), the fastest pace since last January (8.1%).

It also marked the 60th consecutive month of year-over-year gains, which if you’re doing the math, is five full years of gains.

A month ago, NAR chief economist Lawrence Yun referred to the rapid price appreciation as “concerning” because it was doubling the pace of income growth.

Meanwhile, the S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index (I feel like this title needs to be longer) chalked a 5.9% annual gain in January, up from 5.7% a month earlier.

The index also hit a 31-month annual return high, which forced Managing Director and Chairman of the Index Committee David M. Blitzer to address affordability concerns.

He argued that while higher home prices and mortgage rates may dent affordability and reduce the number of households able to purchase homes, the lack of inventory and strength of the economy means we likely won’t see a change in direction just yet.

Blitzer did admit “at some point” market forces would drive prices down, but said, “we don’t appear to be there yet.”

Supply and Demand Imbalance

  • While home prices feel really high
  • The supply/demand imbalance means they won’t come down
  • Until prospective buyers can no longer afford them
  • But it’s unclear when that will actually materialize

I think everyone feels the same way, that prices are too darn high, it’s just that no one knows when prices will fall, or by how much. And what the catalyst might be, other than affordability or a lack of willing buyers.

Everyone is referring to the current situation as an inventory crisis, with many potential move-up buyers trapped thanks to limited equity and/or a low mortgage rate they don’t want to let go.

That further limits the supply of starter homes, keeping renters out of the market as they watch home prices creep higher and higher.

In fact, Trulia reported that national housing inventory hit its lowest level on record during the first three months of 2017. I believe their data only goes back to 2012 though.

Still, the recent numbers are troubling – starter and trade-up home inventory fell 8.7% and 7.9%, respectively, year-over-year. And there wasn’t much a year ago either…

Basically, this means the entire housing market ecosystem is out of whack, with no sign of relief anytime soon.

Are Home Prices Really Expensive?

  • Home prices may not be as high as they look
  • When you factor in inflation, interest rates, wage growth, etc.
  • We see that real home prices remain 33.3% below the peak seen in 2006
  • Of course prices at that time were unsustainable so it shouldn’t necessarily be a benchmark

To add insult to injury, home prices might not even be that high, assuming you look at “real home prices,” those adjusted for inflation, wage growth, interest rates, etc.

The First American Real House Price Index (RHPI) measures single-family home prices after accounting for changes in incomes and interest rates.

They use median household income and mortgage rates to determine how much a particular consumer can afford. This allows them to measure house-buying power and in turn affordability.

What we wind up with is a very difficult picture than what you might see with other home price charts.

For example, real house prices are still 33.3% below their peak seen in July 2006, not that we should measure a healthy market based on that turbulent time. Still, it’s quite a margin.

Additionally, real home prices are 10.3% lower than they were in the year 2000.

Now can that all change in a hurry? Sure, and it is. In just the past year, real house prices surged by 8.2%.

If both mortgage rates and home prices continue to rise, we’ll hit another breaking point soon enough, assuming wage growth can’t keep up.

First American chief economist Mark Fleming noted that despite this, “affordability in most markets is still high by historical standards.”

As such, he expects another strong spring home buying season. Or at least lots of interest, despite a lack of inventory.

Source: thetruthaboutmortgage.com

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The historic multifamily construction boom is already fading

Those same interest rates pushing would-be homebuyers to the sidelines are also hurting multifamily developers.