With inflation reaching a new high in June, the Federal Reserve will likely take more aggressive action. And that could influence even higher mortgage rates, says NAR Chief Economist Lawrence Yun.

Inflation rose to a new 40-year high in June and is accelerating even faster than expected, according to data from the Bureau of Labor Statistics’ Consumer Price Index. Consumer prices jumped 9.1% last month and posted an annualized inflation rate of 17%, much higher than economists predicted. Consumers faced record-high gas prices and spiking grocery costs last month.

“The Fed may be forced to raise interest rates even more aggressively than planned—even with the rising possibility of a recession on the horizon,” says Lawrence Yun, chief economist for the National Association of REALTORS®. “The mortgage market had already factored in several additional rounds of the Fed’s rate hike but may have to adjust a bit higher based on today’s uncomfortable inflation rate.”

That could be a major blow to aspiring home buyers who have been nervously watching mortgage rates climb drastically over the last few weeks. The 30-year fixed-rate mortgage averaged 5.3% last week, up from 2.9% just a year earlier, according to Freddie Mac. Meanwhile, home prices have risen 15% over the past year. (Note: Home prices are not included in the latest inflation figures. Likewise, the 50% rise in monthly mortgage payments this year versus last year also is not reflected in the CPI, Yun notes.)

A new Forbes.com analysis shows that mortgage rates have contributed to higher monthly mortgage payments more than rising home prices. The publication’s analysis shows that in the past 12 months, the typical monthly payment has increased up to 57%. Higher mortgage rates alone accounted for $408 of the average $725 increase in payments, while higher home prices accounted for $239, the analysis notes. (The remaining balance came from higher mortgage rates that were applied to a higher principal.)

“The homeowners who locked in low interest rates the prior two years have fixed, non-rising monthly mortgage payments,” Yun says. That’s “a different story for renters. Rents rose by 6% from last year and are rising at a 10% annualized rate. Rents will continue to rise in the upcoming years.” The Federal Reserve’s next meeting is slated for the end of July. Many economists predict the Fed will tighten its monetary policy further to control inflation. That could lead to another 75- or 100-basis point increase in the Fed’s short-term benchmark rate. While the Fed’s benchmark rate does not directly impact mortgage rates, it does influence them. Yun said following the Fed’s last rate hike—its largest since 1994—that the buyer pool could shrink as mortgage rates increase.

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Borrowing costs tick up again as the Federal Reserve’s inflation policy has economists bracing for even higher rates in the future.

Mortgage rates are showing volatility as the economy slows and recession fears take center stage. The 30-year fixed-rate mortgage rose to an average of 5.51% this week, up from 5.3% last week, according to Freddie Mac.

Home buyers are facing rising costs across the spectrum. Inflation shot to a new 40-year high in June and is accelerating even faster than expected, according to Consumer Price Index data released Wednesday, raising the prospect of a recession. The CPI jumped 9.1% last month, leading to a spike in grocery costs, record-high gas prices, and escalating rents. To boot, monthly mortgage payments soared 51% higher year over year, according to data from the National Association of REALTORS®. The median price for an existing home rose 14.6% year over year in May.

“With the potential of a more aggressive rate hike from the Federal Reserve at the end of the month, mortgage rates will likely rise even further,” says Nadia Evangelou, NAR’s senior economist and director of forecasting. “However, even with this increase, mortgage rates will continue to be historically low—below 8%—in 2022.”

Each bump upward in mortgage rates is being felt hard by home buyers. “Mortgage rates are volatile as economic growth slows due to fiscal and monetary drags,” says Sam Khater, Freddie Mac’s chief economist. “With rates the highest in over a decade, home prices at escalated levels and inflation continuing to impact consumers, affordability remains the main obstacle to homeownership for many Americans.”

Freddie Mac reports the following national averages with mortgage rates for the week ending July 14:

• 30-year fixed-rate mortgages: averaged 5.51%, with an average 0.8 point, increasing from last week’s 5.30% average. Last year at this time, 30-year rates averaged 2.88%.
• 15-year fixed-rate mortgages: averaged 4.67%, with an average 0.8 point, also rising from last week’s 4.45% average. A year ago, 15-year rates averaged 2.22%.
• 5-year hybrid adjustable-rate mortgages: averaged 4.35%, with an average 0.2 point, increasing from last week’s 4.19% average. A year ago, 5-year ARMs averaged 2.47%.

Freddie Mac reports commitment rates along with average points to better reflect the total upfront costs of obtaining a mortgage.

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Reprinted with permission

The Federal Reserve is expected to raise its key benchmark rate this coming week. What impact could it have on mortgage rates?

Mortgage rates rose slightly this week ahead of the Federal Reserve’s highly anticipated meeting next Tuesday, when it is expected to increase its benchmark rate by up to a full percentage point. What impact could that have on mortgage rates ahead?

“Even though the upcoming rate hike will be more aggressive, it’s expected to have a smaller impact on mortgage rates,” Nadia Evangelou, senior economist and director of forecasting for the National Association of REALTORS®, writes at the association’s blog. “Data shows that mortgage rates have already priced in some of the effects of the upcoming Fed’s rate hikes.”

That would be welcome news to home buyers who are getting nervous about rapidly increasing borrowing costs. Rising mortgage rates are tamping down housing demand, as existing-home sales in June were down 14.2% from a year earlier, according to NAR data. The Census Bureau also reports that builders have slowed new-home construction as more buyers get priced out.

“The housing market remains sluggish as mortgage rates inch up for the second consecutive week,” says Sam Khater, Freddie Mac’s chief economist. “Consumer concerns about rising rates, inflation and a potential recession are manifesting in softening demand.”

Home affordability is worsening, with the costs of buying a home now about 80% more expensive than in June 2019 before the pandemic, Evangelou says. Nearly 25% of buyers who purchased their home in 2019 couldn’t buy at today’s higher prices and mortgage rates, she adds. The median price for an existing home climbed to a record high in June, reaching $416,000—up 13.4% compared to a year earlier, according to NAR data.

Freddie Mac reports the following national rates for the week ending July 21:

• 30-year fixed-rate mortgages: averaged 5.54%, with an average 0.8 point, increasing from last week’s 5.51% average. Last year at this time, 30-year rates averaged 2.78%.
• 15-year fixed-rate mortgages: averaged 4.75%, with an average 0.8 point, increasing from last week’s 4.67% average. A year ago, 15-year rates averaged 2.12%.
• 5-year hybrid adjustable-rate mortgages: averaged 4.31%, with an average 0.3 point, dropping from last week’s 4.35% average. A year ago, 5-year ARMs averaged 2.49%.

Freddie Mac reports commitment rates along with average points to better reflect the total upfront cost of obtaining the mortgage.

©National Association of REALTORS®
Reprinted with permission

The next downturn may be different than the last. Look to commercial real estate for clues about the direction of the economy.

The U.S. gross domestic product contracted in the first quarter by 1.5%. The stock market has been tumbling. Inflation is stubbornly high. The Federal Reserve plans to continue raising interest rates. Pending home sales have fallen for six straight months and are now trending slightly below 2019 levels. The economy, in short, is on the verge of a recession.

Yet, it will not be a straightforward recession. Despite hiring freezes at tech firms and recent job cuts among mortgage lenders as refinance business dries up, the bigger problem for the economy is not a lack of jobs but rather a shortage of workers. Statistically, there are two job openings for each unemployed person. That’s why wages are up an average of 5.5% from a year ago, to nearly $32 per hour nationwide. However, inflation is gobbling the increase up with an 8% rise in the cost of living.

A recession typically means bad news for commercial real estate. But this time, the condition of the commercial market may be an indicator about the direction of the overall economy. Demand for apartments and single-family rentals is booming because of consistent job gains and affordability challenges in the For Sale market. Low vacancy rates, though, have pushed up average rents significantly this year. Demand for warehouse space has surged as retailers look to avoid supply-chain disruptions. The retail sector is recovering, with more fitness gyms, nail salons, and restaurants popping up in the suburbs. Hotel bookings, air travel, and park attendance, are above pre-pandemic levels. Consumer spending in the GDP calculation was up a solid 3.1%, even after adjusting for inflation. Weak trade numbers—exports were down and imports were up—brought the fall in GDP. Homeowners, after all, have accumulated sizable housing wealth: $75,100 in the last two years and $155,400 over the past five years. The stock market is going through a painful correction, though the broad S&P 500 index is up by 70% from five years ago. That’s why total net household wealth has essentially doubled from 10 years ago.

The office market is another story. There’s no strong desire on the part of employees to return to their downtown offices. Google’s GPS tracker shows robust movement just about everywhere except in office locations during work hours. Some form of working from home will be a permanent feature of the post–COVID-19 economy. This is also the reason traffic jams are happening more often on weekends than on weekdays. Welcome to the new normal.

Housing Inventory Edges Up

Total housing inventory at the end of April 2022 amounted to 1.03 million units, up 10.8% from March but down 10.4% from one year ago. At the current sales pace, there was a 2.2-month supply, up from 1.9 months in March and down from 2.3 months in April 2021.

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Reprinted with permission

Record-high home prices, declining consumer confidence and fears of recession are taking their toll on aspiring homeowners.

With volatile mortgage rates driving home buyers from the market, economists are skeptical that a dip in borrowing costs this week will have a meaningful impact. The 30-year fixed-rate mortgage fell to an average of 5.3%—still nearly double what it was a year ago—for the week ending July 28, according to Freddie Mac.

“Purchase demand continues to tumble as the cumulative impact of higher rates, elevated home prices, increased recession risk and declining consumer confidence take a toll on home buyers,” says Sam Khater, Freddie Mac’s chief economist. “It’s clear that over the past two years, the combination of the pandemic, record low mortgage rates and the opportunity to work remotely spurred greater demand. Now, as the market adjusts to a higher rate environment, we are seeing a period of deflated sales activity until the market stabilizes.”

The National Association of REALTORS® reported this week that contract signings were down 20% in June compared to a year earlier. NAR is forecasting that by the end of 2022, home sales will have fallen 13% on an annual basis. “With mortgage rates expected to stabilize near 6% and steady job creation, home sales should start to rise by early 2023,” Lawrence Yun, chief economist for the National Association of REALTORS®, said Wednesday during NAR’s quarterly Real Estate Forecast Summit.

Freddie Mac reports the following national averages for mortgage rates for the week ending July 28:

• 30-year fixed-rate mortgages: averaged 5.30%, with an average 0.8 point, dropping from last week’s 5.54% average. Last year at this time, 30-year rates averaged 2.80%.
• 15-year fixed-rate mortgages: averaged 4.58%, with an average 0.8 point, falling from last week’s 4.75% average. A year ago, 15-year rates averaged 2.10%.
• 5-year adjustable-rate mortgages: averaged 4.29%, with an average 0.3 point, dropping from last week’s 4.31% average. A year ago, 5-year ARMs averaged 2.45%.

Freddie Mac reports commitment rates along with average points to better reflect the total upfront cost of obtaining the mortgage.

©National Association of REALTORS®
Reprinted with permission

The market has mostly priced in current and future Fed actions, so mortgage rates shouldn’t rise dramatically, says NAR Chief Economist Lawrence Yun.

With skyrocketing inflation and mounting recession fears, the Federal Reserve made another aggressive move Wednesday, raising its benchmark rate by three-quarters of a percentage point for the second time this year to try and tame the economy. However, higher mortgage rates may not necessarily be on the horizon as a result, says Lawrence Yun, chief economist for the National Association of REALTORS®.

“This is unlikely to do any further damage to mortgage rates,” Yun says. “The long-term bond market on which mortgage rates are generally priced has mostly priced in all future actions by the Fed and may have already peaked with the 10-year Treasury shooting up 3.5% in mid-June.” The Treasury was at 2.8% following the Fed’s decision.

“It is possible that the 30-year fixed-rate mortgage may settle down at 5.5% to 6% for the remainder of the year,” Yun says. “Still, mortgage rates are significantly higher now compared to one year ago, which is why home sales have been falling.”

The 30-year fixed-rate mortgage has doubled over the past year. Last week, rates averaged 5.54%, up from 2.78% a year ago, according to Freddie Mac.

Mortgage Rates Become Housing’s Wild Card

The Fed warned on Wednesday that more hikes to its short-term benchmark rate are likely to come. “As the Fed continues to march forward with rate increases aimed at countering inflation, the path for mortgage rates is less well-defined,” says Ruben Gonzalez, chief economist at Keller Williams.

Some economists believe mortgage rates may even fall following the Fed’s action on Wednesday. “The Fed meeting is more likely to bring about lower mortgage rates than higher mortgage rates as long-term rates respond to growing recession worries,” says Greg McBride, Bankrate’s chief financial analyst.

The housing market has slowed dramatically as home buyers face the double-whammy of rising mortgage rates and record-high home prices. NAR’s latest housing data shows the slowdown: Contract signings are down 20% year over year, existing-home sales have fallen 14%, and new-home sales are at their lowest level since April 2020. If mortgage rates could stabilize near current levels, future home sales would likely then be dependent on jobs and consumer confidence, Yun notes. “Therefore, home sales could soon stabilize within a few months and then steadily turn upwards from early next year,” Yun says. NAR has updated its forecast and is predicting home sales to fall by 13% in 2022 and start to rise in early 2023.

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Reprinted with permission

A housing slowdown precipitated by low inventory and rising mortgage rates will open opportunities for some buyers, NAR Chief Economist Lawrence Yun predicts.

Even though national GDP contracted for the second quarter in a row and home sales have fallen for five straight months, property prices are likely to continue growing because of low inventory, Lawrence Yun, chief economist for the National Association of REALTORS®, said Wednesday during NAR’s quarterly Real Estate Forecast Summit. Yun offered his economic and housing market predictions for the remainder of this year and into 2023 at the event.

One of the most unusual aspects of the current economy is the labor market, Yun said. There were more job openings than unemployed people in May—with the difference being nearly two to one, according to Bureau of Labor Statistics data. Construction job openings were at a record high in January, and these unfilled jobs point to a potential slowdown in the housing market, Yun said.

Both existing-home sales and pending home sales have been falling or stagnant for months, NAR data shows. Rising mortgage rates have combined with low inventory to exert downward pressure on the market. “Closing activity will continue to sink even more,” said Yun. “Some [potential home buyers] don’t want to pay higher monthly rates. Others can’t.”

Hope for Consumers

There are bright spots in the market, such as gradually increasing inventory, which is good news for consumers. “They no longer have to make an offer after seeing only one [house],” Yun said. “They can see three or four. It’s returning to a normal process.”

Despite some homes with high list prices beginning to languish on the market, the overall lack of inventory is still leading to price gains. “Even after reductions, prices are still higher compared to one year ago and much higher compared to before the pandemic,” Yun added.

Though the Federal Reserve is expected to hike interest rates several more times this year, Yun said mortgage rates won’t rise much further because lenders have already priced in the potential increases. This can mean increased opportunity for consumers. “We may be topping out independent of what the Fed will do,” Yun said. “Rates will go a little up and a little down. It may be a good idea to lock in when the rates are down.”

He also noted that foreign investment in U.S. real estate is still well short of pre-pandemic levels but predicted that international interest is likely to increase as travel restrictions ease.

Finally, Yun predicted that in 2022, total home sales will be down 13% from the previous year, home prices will be up 11% and total dollar volume will be down 2%. For 2023, he predicted no increase in home sales, a 2% hike in prices and a 2% increase in dollar volume.

Current Trends and Market Opportunities

Jessica Lautz, NAR’s vice president of demographics and behavioral insight, also provided data from the June REALTORS® Confidence Index. Among her key findings:

• Median days on market for homes nationwide hit a record low of 14.
• The average number of offers per property dipped to 3 from a previous high of 5.
• Approximately 30% of buyers are waiving inspection and appraisal contingencies—a number that has held fairly steady since the start of the pandemic.
• The share of all-cash buyers currently stands at 25%. This number has actually decreased from a high of 35% in 2014.
• First-time buyers are still being sidelined and make up 30% of the market. Historically, they make up around 40%.

In addition, Lautz offered five “touch points”—opportunities for REALTORS® to reach out to clients in the current climate.

1. Twelve percent of buyers are purchasing homes virtually—and they want a REALTOR® to assist with the process.
2. Remote work continues to influence buying trends: 34% of buyers want features that enable them to work from home.
3. Consumers continue to have a skewed view of the typical amount required for a down payment. Thirty-five percent of buyers believe a down payment of 16% to 20% is required; 10% of buyers believe they need a down payment of more than 20%. However, the typical down payment for a first-time buyer is only 6% to 7%. For a repeat buyer, it’s 17%.
4. There is value in promoting energy efficiency in listings: Forty-four percent of REALTORS® say it’s “somewhat valuable,” and 19% say it’s “very valuable.”
5. Seven in 10 buyers report a desire for the latest in heating and cooling, windows and doors, insulation, lighting and appliances; however, the typical home purchased is 29 years old and unlikely to have the newest features. This disconnect presents an opportunity for REALTORS® to contact previous clients about satisfaction with their current home and any improvements they have made.

©National Association of REALTORS®
Reprinted with permission