A contracting economy typically means a recession, but other economic indicators are likely to mitigate the effects of the slowing economy, says NAR’s chief economist.

The country isn’t officially in a recession yet, despite two consecutive quarters of national contraction of the gross domestic product, a commonly cited indicator of an economic downturn, says Lawrence Yun, chief economist for the National Association of REALTORS®. And several healthy economic trends, including a robust job market, coupled with new efforts to boost affordable housing could stave off a more serious slump, Yun adds.

New guidance from the Treasury enabling state and local governments to use leftover emergency COVID-19 funding from the American Rescue Plan to create affordable housing should help ease the inventory crisis and counteract the effects of a tightening economy. Still, there are questions about whether the U.S. has entered “stagflation,” a period of high inflation combined with an economic slowdown, as many Americans feel the frustrating effects of a slower economy and higher consumer prices. But the National Bureau of Economic Research, the council that watches over U.S. business cycles, has yet to declare a recession, Yun notes.

There are two major factors at work counteracting current economic conditions:

1. Job creation is robust. Total payroll jobs were over 150 million in early 2020 before the onset of the pandemic, Yun said at NAR’s Real Estate Forecast Summit last week. While COVID-19 shutdowns precipitated a steep decline in jobs, each month showed strong job creation after the restrictions were lifted. Though there is variation across the country, Yun says, the job market has largely recovered. “We are essentially at the same level of jobs and W-2 employment now compared to pre-COVID days,” he said. Data from the Bureau of Labor Statistics shows that right now, there are more job openings than unemployed people. As of June, there were 5.9 million workers searching for jobs and over 10 million job openings. So, while high unemployment typically characterizes a recession, “the ratio [today] is almost two to one,” Yun said. “It’s a very unusual recession—if we are in one.”
2. Commercial real estate is growing. Though a recession typically means bad news for commercial properties, the commercial market as a whole is flourishing despite a stagnant office sector, Yun writes in a recent REALTOR® Magazine column. Rental demand is booming, and rents are up significantly. Demand for warehouse space has surged as retailers stock up to avoid supply chain disruptions. Hotel bookings, air travel and park attendance are now above pre-pandemic levels. All of this increased activity has led to high demand for new commercial construction. “The improving construction sector means that any recession will be mild,” Yun said.

Despite the positive economic signs, falling homes sales remain a concern. “Home sales are down largely because mortgage rates have risen sharply,” Yun said at last week’s event. “If interest rates rise further, then home sales will decline even more—even if there is no recession.” One long-term solution is to increase housing supply, which is why the Treasury’s announcement is meaningful. The change in ARP guidance could mean significantly more funds going to housing supply and a reduction in costs for buyers over time. Another factor that will help in the short term is employers finding a way to match workers to openings and fill jobs, Yun said. “We still need workers. In an environment with rising mortgage rates, what will drive homes sales is jobs.”

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The average monthly mortgage payment has fallen 12% reduction in just two months as high borrowing costs moderate, says NAR Chief Economist.

After weeks of escalating borrowing costs, home buyers are getting a second chance to lock in lower rates. The 30-year fixed-rate mortgage fell to an average just below 5% for the week ending Aug. 4, Freddie Mac reports.

With rates dipping in recent days, mortgage applications are increasing for the first time in five weeks, the Mortgage Bankers Association reported this week. Applications for a home purchase increased 1% last week following weeks of declines as home buyers and refinancers got spooked by higher mortgage rates.

Will the latest lower rates stick around? “Mortgage rates remained volatile due to the tug of war between inflationary pressures and a clear slowdown in economic growth,” says Sam Khater, Freddie Mac’s chief economist. “The high uncertainty surrounding inflation and other factors will likely cause rates to remain variable, especially as the Federal Reserve attempts to navigate the current economic environment.”

Last week, National Association of REALTORS® Chief Economist Lawrence Yun predicted that the Federal Reserve’s decision to raise its short-term fed funds rate by 75 basis points was unlikely to do any further damage to mortgage rates. “The mortgage and longer-term bond markets have settled down in recent weeks,” Yun says. “The peak in mortgage rates may have already occurred. That’s because oil and gasoline prices have been falling lately and, hence, will lessen broader inflationary pressures. Lower inflation means less aggressive interest rates by the Federal Reserve.”

Any decline in mortgage rates is likely relief to potential home buyers. “Though still higher than a year ago, the current rate of under 5% means around a 12% reduction in monthly payments compared to when mortgage rates peaked at 6% just two months ago,” Yun says. “Mortgage rates could soon turn upward but are unlikely to retouch the 6% mark. Any dip should be viewed as a second-chance opportunity.”

Freddie Mac reports the following national averages with mortgage rates for the week ending Aug. 4:

• 30-year fixed-rate mortgages: averaged 4.99%, with an average 0.8 point, dropping from last week’s 5.30% average. Last year at this time, 30-year rates averaged 2.77%.
• 15-year fixed-rate mortgages: averaged 4.26%, with an average 0.6 point, falling from last week’s 4.58% average. A year ago, 15-year rates averaged 2.10%.
• 5-year hybrid adjustable-rate mortgages: averaged 4.25%, with an average 0.3 point, dropping from last week’s 4.29% average. A year ago, 5-year ARMs averaged 2.40%.

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

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Reprinted with permission

Though weekly changes in borrowing costs are volatile, housing activity is reaching more balanced levels—which is ultimately good for buyers, says Freddie Mac’s chief economist.

Home buyers are having difficulty gauging opportunities to save on a property purchase as mortgage rates become more volatile. The average for the 30-year fixed-rate mortgage swung above 5% again this week, clocking in at 5.22%, Freddie Mac reports. Last week, the average for the 30-year fixed-rate mortgage was 4.99%. However, rates may not go much higher: Lawrence Yun, chief economist for the National Association of REALTORS®, says falling inflation in July may suggest mortgage rates are topping out.

“Although rates continue to fluctuate, recent data suggest that the housing market is stabilizing as it transitions from the surge of activity during the pandemic to a more balanced market,” says Sam Khater, Freddie Mac’s chief economist. “Declines in purchase demand continue to diminish while supply remains fairly tight across most markets. The consequence is that house prices likely will continue to rise, but at a slower pace for the rest of the summer.”

The National Association of REALTORS® reported this week that housing affordability decreased precipitously in the second quarter, driven by a sharp rise in rates and double-digit home price increases. The average monthly mortgage payment on a typical existing single-family home (assuming a 20% down payment) climbed to $1,841, marking an increase of $444 compared to the first quarter.

Households are spending 24.3% of their income on mortgage payments, up from 16.9% a year ago, according to NAR data. First-time home buyers are getting hit hardest, typically spending about 37% of their household income on mortgage payments. Most financial experts consider households to be cost-burdened when they spend more than 25% of their income on housing.

Freddie Mac reports the following national averages with mortgage rates for the week ending on Aug. 11:

• 30-year fixed-rate mortgages: averaged 5.22%, with an average 0.7 point, rising from last week’s 4.99% average. Last year at this time, 30-year rates averaged 2.87%.
• 15-year fixed-rate mortgages: averaged 4.59%, with an average 0.7 point, increasing from last week’s 4.26% average. A year ago, 15-year rates averaged 2.15%.
• 5-year hybrid adjustable-rate mortgages: averaged 4.43%, with an average 0 point, increasing from last week’s 4.25% average. A year ago, 5-year ARMs averaged 2.44%.

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

©National Association of REALTORS®Reprinted with permission

NAR’s chief economist shares what now needs to happen to bring down borrowing costs and increase affordability for home buyers.

Inflation eased slightly in July, which could bode well for the housing market in the months ahead, says Lawrence Yun, chief economist for the National Association of REALTORS®. Overall, inflation slowed from 9.1% in June to 8.5% in July, but prices for food and rent continued to climb, the Bureau of Labor Statistics’ Consumer Price Index showed Wednesday.

Still, the slight deceleration suggests that consumer price inflation may have peaked, which suggests that mortgage rates also may have peaked, Yun says. The level of inflation “is still high and uncomfortable but may indicate the start of a steady retreat,” Yun adds.

Gasoline prices posted a 7% monthly decline, a significant contributor to the recent moderation in inflation. However, prices remain 44% higher than a year ago and 104% higher than two years ago. Also, the CPI showed that the rising costs of food, up 10.9% in July, continue to hit many Americans’ pocketbooks. That’s the highest increase in food prices since May 1979. Household energy costs were up 20.5%, and furniture costs were up 14.8%.

Rents continued to rise in July, up 6.3% compared to a year prior, the CPI showed. “That is a testament to the ongoing housing shortage,” Yun says.

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But could the worst of sky-high inflation be behind Americans? Yun thinks so. “If there is a sustained decline in gasoline prices and more production of apartments and single-family homes, consumer prices will pull back, encouraging the Federal Reserve policy to be less aggressive,” Yun says. “Mortgage rates will fall.” On Wednesday morning, the 10-year Treasury yield stood at 2.7%. “That should translate into 30-year mortgage rates pulling back to under 5%,” Yun says. “Some recent potential home buyers who were pushed out of the market may now be able to get back in and qualify for a mortgage.”

As inflation appears to have peaked, borrowing costs are starting to stabilize.

Mortgage rates appear to be settling in the 5% range after recent dramatic climbs that shocked home buyers. The 30-year fixed-rate mortgage averaged 5.13% this week, down slightly from its 5.22% average a week ago, Freddie Mac reports.

Mortgage rates peaked at 6% in early June, which prompted a pullback in housing demand. However, “home sales may soon stabilize since mortgage rates have fallen to near 5%, thereby giving an additional boost of purchasing power to home buyers,” says Lawrence Yun, chief economist for the National Association of REALTORS®.

Inflation appears to have peaked, which has stopped the rapid increase in mortgage rates, says Sam Khater, Freddie Mac’s chief economist. “The market continues to absorb the cumulative impact of the large price and rate increases that led to a plunge in affordability,” Khater says. “As a result, over the rest of the year, purchase demand likely will continue to drag, supply will modestly increase and home price growth will decelerate.”

Total mortgage demand fell to its lowest level in 22 years last week, the Mortgage Bankers Association reports. A big contributor is falling refinance applications, as homeowners have less incentive to refinance due to higher rates. Still, mortgage applications to purchase a home are 18% lower than a year ago as more buyers step away due to higher mortgage rates and inflation, the MBA reports.

Freddie Mac reports the following national averages with mortgage rates for the week ending Aug. 18:

• 30-year fixed-rate mortgages: averaged 5.13%, with an average 0.8 point, falling from last week’s 5.22% average. Last year at this time, 30-year rates averaged 2.86%.
• 15-year fixed-rate mortgages: averaged 4.55%, with an average 0.7 point, dropping from last week’s 4.59% average. A year ago, 15-year rates averaged 2.16%.
• 5-year hybrid adjustable-rate mortgages: averaged 4.39%, with an average 0.3 point, dropping from last week’s 4.43% average. A year ago, 5-year ARMs averaged 2.43%.

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

Housing affordability hit a 33-year low in June, according to NAR data. But an increase in inventory and stabilizing mortgage rates may stem the tide.

The average monthly mortgage payment jumped 54% year over year in June while the median household income rose only 5.8%, according to the National Association of REALTORS®’ Housing Affordability Index. As home affordability weakened and the median home price shot to a record $413,800 in June, NAR’s index fell to its lowest reading in 33 years. “Home prices have increased at a pace that far exceeds wage gains, especially for low- and middle-income workers,” NAR Chief Economist Lawrence Yun said recently.

Housing affordability “dramatically tumbled” in the second quarter amid rising mortgage rates and climbing home prices, NAR data shows. Monthly mortgage payments on a typical existing single-family home surged by nearly a third compared to the first quarter and by half compared to a year earlier. The 30-year fixed-rate mortgage has nearly doubled in that time. Although rates stabilized somewhat this month, they remain significantly higher than a year ago.

The average monthly mortgage payment rose to $1,944 in June from $1,265 a year earlier—a $679 difference, NAR notes. The annual mortgage payment as a percentage of income rose to 25.4%; most financial experts consider housing payments that exceed 25% of income to be unaffordable. “Monthly mortgage payments have soared compared to last year, and rising home prices are not helping affordability conditions,” Michael Hyman, a research data specialist at NAR, notes on the association’s Economists’ Outlook blog. “One good sign for the housing market is a welcome increase in the supply of inventory. Another is that rates recently have cooled, slowing the pace of growing monthly mortgage payments.”

Housing affordability posted double-digit declines in June compared to a year ago in all four major regions of the U.S. The Midwest was the most affordable region, with a median household income of $90,650 but a qualifying income of $68,496 needed to buy a median-priced home in the area. On the other hand, the least affordable region continues to be the West, where the median family income was $98,498 but a qualifying income of $141,552 was needed to purchase a median-priced home. This marks the fourth consecutive month the Western region posted a reading on NAR’s affordability index below 100, which means a family earning the median income in the region can’t afford a median-priced home.

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Reprinted with permission