NAR Chief Economist Lawrence Yun paints a picture of what could happen with borrowing costs once it passes a critical threshold.

Mortgage rates remained just shy of 7% this week—the 30-year fixed rate loan is at 6.94%—which could be a “new normal” after recent rapid increases in borrowing costs, says Nadia Evangelou, senior economist and director of forecasting for the National Association of REALTORS®. Mortgage rates have been hovering near 7% for the last month.

Higher mortgage rates are prompting home buyers to adjust their price points so they don’t go over budget. A year ago, a home buyer looking to spend about $1,500 on a monthly mortgage payment could afford a $380,000 home, says Lisa Sturtevant, chief economist for Bright MLS. Today, with mortgage rates more than double what they were a year ago, that budget has dropped to $250,000. “In many areas of the country, homes in this price range don’t exist,” she says. First-time home buyers may be hit particularly hard because they don’t have equity to roll into a new home purchase, Sturtevant adds.

The heights that mortgage rates have reached caught the housing market off guard. “At the beginning of the year, it seemed very unlikely that mortgage rates would push past 6%,” Sturtevant says. “Now the question is how high will they go? A lot of the answer depends on how aggressive the Federal Reserve is going to go on rate hikes in its next two meetings. But the impacts of the Federal Reserve’s actions are crystal clear: The Fed will continue to raise rates in an attempt to tamp down inflation, even if it causes pain in the short term.”

NAR Chief Economist Lawrence Yun warned at the recent National Association of Real Estate Investors conference in Atlanta that mortgage rates could rise up to 8.5%, “which would be another big shock to the housing market.” With inflation outpacing wage growth, the typical family is spending more than 25% of their income on mortgage payments, Evangelou writes at the association’s blog, Economists’ Outlook. “Including other expenses, such as mortgage insurance, home insurance, taxes and expenses for property maintenance, homebuying costs exceed 30% of a typical family’s income,” she notes. Many financial experts consider households in this situation to be cost-burdened.

Mortgage rates at 7% were typical in the mid- to late-1990s and early 2000s. But home buyers today are facing high inflation and more expensive home prices. “The 30-year fixed-rate mortgage continues to remain just shy of 7% and is adversely impacting the housing market in the form of declining demand,” says Sam Khater, Freddie Mac’s chief economist. “Additionally, homebuilder confidence has dropped to half of what it was just six months ago, and construction—particularly single-family residential construction—continues to slow down.”

Freddie Mac reports the following national averages with mortgage rates for the week ending Oct. 20:

• 30-year fixed-rate mortgages: averaged 6.94%, with an average 0.9 point, rising from last week’s 6.92% average. Last year at this time, 30-year rates averaged 3.09%.
• 15-year fixed-rate mortgages: averaged 6.23%, with an average 1.1 point, rising from last week’s 6.09% average. A year ago, 15-year rates averaged 2.33%.
• 5-year hybrid adjustable-rate mortgages: averaged 5.71%, with an average 0.4 point, dropping from last week’s 5.81% average. A year ago, 5-year ARMs averaged 2.54%.

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

©National Association of REALTORS®
Reprinted with permission

Despite signs of a housing recession, some buyers will be back to try again.

The housing recession is here, but it’s not what you might think. There’s very little distress in the market, with less than 1% of home sales in foreclosure or needing a bank-approved short sale. Owners’ aggregate housing wealth, the asset valuation minus the outstanding mortgage, is at an all-time high of $32.1 trillion, a gain of $8.5 trillion since the pandemic began. A typical homeowner’s wealth has jumped to an estimated $320,000 versus a typical renter’s wealth of $8,000. Real estate investors are also gaining in terms of wealth and strong rent growth. There’s still a residual housing shortage. Inventory conditions are only modestly higher than the supertight conditions of a year ago. Home prices are up from a year ago in nearly every market across the country.

The economic recession refers to weaker and less income-generating economic activity. The housing recession is here because of reduced income for brokerage services and mortgage lending and the fall in home construction. Job cuts have been announced for people working in the housing industry. Consequently, the housing sector subtracted 0.7% from the gross domestic product in the second quarter. The GDP itself declined 0.9%.

The key reason for the housing recession was the sudden sharp rise in mortgage rates in the first half of the year. Mortgage rates perhaps overshot because of the uncertain outlook for consumer price inflation. However, with gasoline prices steadily falling and the U.S. dollar strengthening against other currencies, the inflation rate may already have peaked. Mortgage rates showed signs of stabilization in July and August. That means further home sales and construction declines could be over very soon. That’s not to say homes will sell like gangbusters, but sales will stabilize first and then resume modest growth as job creation in the broader economy brings about a new potential set of buyers. Some buyers who were priced out in early June may be ready to jump back into the market—a second-chance opportunity.

Housing Inventory Up

Total housing inventory for July was 1,310,000 units, an increase of 4.8% from June. At the current sales pace, unsold inventory sits at a 3.3-month supply, up from 2.9 months in 32% June and 2.6 months in July 2021.

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Reprinted with permission

Rising interest rates have increased the average monthly loan payment by a whopping $1,000 year over year.

With the rate for a 30-year mortgage rising to 7.08% this week—the highest average since April 2002, according to Freddie Mac—the average monthly loan payment is now $1,000 more than a year ago, Nadia Evangelou, senior economist and director of forecasting for the National Association of REALTORS®, writes on the Economists’ Outlook blog.

That’s prompting a sharp pullback in the housing market as home buyers digest the higher rates. Mortgage applications for home purchases—a gauge of homebuying activity—are nearly half of what it was a year ago, the Mortgage Bankers Association reported this week.

Trying to snag a lower rate, more home buyers are reaching for an adjustable-rate mortgage, which tend to have lower introductory rates for a set period of time before resetting. Though ARMs are viewed as a riskier loan product, home buyers are being tempted: This week’s rate for a 5-year ARM is 5.96%. The share of home buyers applying for an ARM has more than quadrupled since the start of the year, MBA reports.

Higher mortgage rates are creating a “greater stagnation in the housing market,” says Sam Khater, Freddie Mac’s chief economist. “As inflation endures, consumers are seeing higher costs at every turn, causing further declines in consumer confidence this month. In fact, many potential home buyers are choosing to wait and see where the housing market will end up, pushing demand and home prices further downward.”

S&P’s CoreLogic Case-Shiller Index shows home prices fell at a record pace in August, dropping 2.6% in monthly comparisons from a year ago. Existing-home sales also are sliding, down 24% year over year in September, according to NAR data. And problems continue to brew for the new-home market, which saw sales plunge nearly 18% in September compared to a year earlier, prompting home builders to press the brakes on future construction, the Commerce Department reports.

Freddie Mac reports the following national averages with mortgage rates for the week ending Oct. 27:

• 30-year fixed-rate mortgages: averaged 7.08% with an average 0.8 point, up from last week’s 6.94% average. Last year at this time, 30-year rates averaged 3.14%.
• 15-year fixed-rate mortgages: averaged 6.36%, with an average 1.4 point, up from last week’s 6.23% average. A year ago, 15-year rates averaged 2.37%.
• 5-year adjustable-rate mortgages: averaged 5.96%, with an average 0.3 point, increasing from last week’s 5.71% average. A year ago, 5-year ARMs averaged 2.56%.

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

©National Association of REALTORS®
Reprinted with permission

Persistent inflation is proving “quite harmful to the housing market,” says NAR Chief Economist Lawrence Yun.

The housing market is quickly contracting as rising mortgage rates and stubbornly high inflation prompts more home buyers—and even sellers—to back away. The National Association of REALTORS®’ Pending Home Sales Index, a forward-looking indicator based on home contract signings, dropped for the fourth consecutive month in September, down 10.2% compared to August and a whopping 31% compared to a year earlier.

“Persistent inflation has proven quite harmful to the housing market,” says NAR Chief Economist Lawrence Yun. “The Federal Reserve has had to drastically raise interest rates to quell inflation, which has resulted in far fewer buyers and even fewer sellers.”

The number of active listings also is falling quickly as more homeowners grow reluctant to trade in the lower mortgage rates they secured in the last few years for today’s higher rates. “The new normal for mortgage rates could be around 7% for a while,” Yun says. “On a $300,000 loan, that translates to a typical monthly mortgage payment of nearly $2,000, compared to $1,265 just one year ago—a difference of more than $700 per month. Only when inflation is tamed will mortgage rates retreat and boost home purchasing power for buyers.”

NAR’s latest report also shows that all four major regions of the U.S. are seeing a sharp pullback in home sales, with pending home sales down about 27% or more on a year-over-year basis in each region. The West is seeing the largest yearly contraction in pending home sales, down 38.7% annually. However, the Northeast posted the largest month-over-month drop in September, with pending home sales down 16.1% compared to August, NAR reports.

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Reprinted with permission

Economists eye two possible scenarios: Rates could rise to 8% or higher by the end of the year, or they could stabilize. Know what to expect.

Mortgage rates this week dipped slightly below 7%, even after the Federal Reserve aggressively raised its benchmark interest rate again to tame inflation. The 30-year fixed-rate mortgage averaged 6.95% this week after hitting a 20-year high of 7.08% last week, Freddie Mac reports.

“Even with the Federal Reserve raising its short-term fed funds rate by another large amount, longer-term interest rates look to move only slightly,” says Lawrence Yun, chief economist for the National Association of REALTORS®. “The mortgage market has already priced in the latest Fed move.”

On Wednesday, the Fed approved its fourth consecutive rate hike of three-quarters of a percentage point to help bring down 40-year high inflation. The central bank’s lending rate now falls within the target range of 3.75% to 4%—its highest since January 2008. “The inflation picture has become more and more challenging over the course of this year,” Fed Chairman Jerome Powell said at a news conference Wednesday. “That means we have to have policy be more restrictive, and that narrows the path to a soft landing.”

What Happens Next?

Mortgage rates will start to “drift lower” once inflation has been contained—but that could be another year or two, Yun notes. However, the slight dip this week in rates likely will offer little relief to priced-out buyers. “Unsure buyers navigating an unpredictable landscape keeps demand declining while other potential buyers remain sidelined from an affordability standpoint,” says Sam Khater, Freddie Mac’s chief economist.

Mortgage rates likely will be volatile in the coming weeks, adds Lisa Sturtevant, chief economist for Bright MLS. “Home buyers expecting mortgage rates to fall significantly will be disappointed,” she says. “The question is: Will rates stabilize or will they push even higher?”

Sturtevant says that if inflation remains stubbornly high, the Federal Reserve could continue to aggressively raise rates. “Under this scenario of persistently higher inflation, mortgage rates could climb to 8% or beyond in late 2022 and into the first part of 2023,” she says.

But if October’s inflation data—which will be released next week—shows signs of easing and offers some indication that the Fed’s tactics are working, the Fed could pull back on its rate increases. That could mean mortgage rates would stabilize, “though probably still remaining around 7%, on average, through the first part of 2023,” she notes.

Mortgage Rate Averages This Week

Freddie Mac reported the following national averages with mortgage rates for the week ending Nov. 3:

• 30-year fixed-rate mortgages: averaged 6.95%, with an average 0.8, falling last week’s 7.08% average. Last year at this time, 30-year rates averaged 3.09%.
• 15-year fixed-rate mortgages: averaged 6.29%, with an average 1.2 point, dropping from last week’s 6.36% average. A year ago, 15-year rates averaged 2.35%.
• 5-year hybrid adjustable-rate mortgages: averaged 5.95%, with an average 0.2 point, falling from last week’s 5.96% average. A year ago, 5-year ARMs averaged 2.54%.

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

©National Association of REALTORS®
Reprinted with permission

The third quarter may have marked the end of price surges as higher mortgage rates put a damper on projections for property appreciation. Read more from NAR’s latest report.

Home prices continued to climb in the third quarter of this year, but the upward trend may finally be coming to an end, according to the National Association of REALTORS®’ latest quarterly report. Higher mortgage rates are starting to weigh on home price growth, though practically every major metro saw home prices rise in the third quarter. Forty-six percent of the 185 markets that NAR tracks even registered double-digit increases.

The national median price for a single-family existing home was $398,000 in the third quarter, an 8.6% jump from a year earlier. That’s a slower pace than in the second quarter, when the median price was 14.2% higher year over year. More easing is expected over the next few months, says NAR Chief Economist Lawrence Yun. “Much lower buyer capacity has slowed home price growth, and the trend will continue until mortgage rates stop rising,” he says. “The median income needed to buy a typical home has risen to $88,300. That’s almost $40,000 more than it was prior to the start of the pandemic.”

Meanwhile, the monthly mortgage payment on a typical existing single-family home with a 20% down payment swelled to $1,840 in the third quarter, up 50% year over year. The 30-year fixed-rate mortgage is currently above 7%—double what it was a year ago—prompting house hunters to revisit what they can afford. The typical family now needs a qualifying income of at least $100,000 to afford a 10% down payment on a mortgage in 59 markets, up from 53 markets in the second quarter. Further, a family with a qualifying income of less than $50,000 can afford a home in just 17 of the markets NAR tracks, down from 23 in the previous quarter.

First-time home buyers are struggling with these dynamics. A typical starter home worth about $338,700 would have a monthly mortgage payment of $1,808 with a 10% down payment, an increase of nearly $600 compared to a year ago. First-time buyers typically spend nearly 38% of their income on mortgage payments; most financial experts consider households financially burdened when they spend more than 25% of their income on housing.

Where Prices Are Rising the Most

Some of the priciest markets in the country, like the San Jose and San Francisco areas in California—with a median home price of $1.7 million and $1.3 million, respectively—could see some cooling in the months ahead. “The more expensive markets on the West Coast will likely experience some price declines following this rapid price appreciation, which is the result of many years of limited homebuilding,” Yun says. “The Midwest, with relatively affordable home prices, will likely continue to see price gains as incomes and rents both rise.”

The South not only saw the highest share of sales of existing single-family homes in the third quarter but also the highest year-over-year appreciation in the country, NAR’s report shows. Prices jumped 11.9% in the region, followed by an 8.2% increase in the Northeast, 7.4% in the West and 6.6% in the Midwest.

The following 10 metros posted the largest year-over-year price increases in the country in the third quarter:

• North Port-Sarasota-Bradenton, Fla.: 23.8%
• Lakeland-Winter Haven, Fla.: 21.2%
• Myrtle Beach-Conway-North Myrtle Beach, S.C.-N.C.: 21.1%
• Panama City, Fla.: 20.5%
• Deltona-Daytona Beach-Ormond Beach, Fla.: 19.6%
• Port St. Lucie, Fla.: 19.4%
• Greenville-Anderson-Mauldin, S.C.: 18.9%
• Kingsport-Bristol-Bristol, Tenn.-Va.: 18.8%
• Tampa-St. Petersburg-Clearwater, Fla.: 18.8%
• Ocala, Fla.: 18.8%

©National Association of REALTORS®
Reprinted with permission