Looking at rising mortgage rates and the housing market, home price growth and what softening home prices means, affordability and much more
A Line In the Sand
From Wolf Street:
It finally happened – a line in the sand has been breached. The average interest rate for 30-year fixed-rate mortgages with conforming loan balances ($453,100 or less) and a 20% down-payment did what people had thought in 2016 we’d never see again: It breached 5%.
This is likely not the pain-threshold for the housing market, though it is already putting pressure on it at the margin, with some potential buyers being scared off and other potential buyers finding the inflated home prices of today with the current mortgage rates outside their range of affordability. As interest rates have risen, some potential buyers have fallen by the wayside – though not a huge number just yet.
But 6% will likely be the pain threshold, in my estimates. It will block a considerable number of potential buyers from buying at current prices. Home prices would have to fall first.
Is 6% the point that will cause home prices to fall from a drop in the number of home buyers? The basic economic law of supply and demand is inescapable…
We have seen much higher mortgage rates in the past but this time may be different. Stagnant incomes combined with higher home prices is also something to consider…
It all boils down to doing what is best for you and your long range goals and your current financial situation.
Red Flags in Housing?
Despite a robust U.S. economy, at least as measured by gross domestic product, real home price growth is locked in a cyclical downturn. If that’s not bad enough, it will likely get worse based on the same approach and factors that correctly flagged the housing bust — in real time — in early 2006.
Home prices are highly cyclical and, as everyone discovered from the last recession, their movements can have material consequences for the broader economy. Yet, according to the minutes of the Federal Reserve’s Aug. 1 monetary policy meeting, policy makers are only starting to recognize the “possibility” of a significant weakening in the housing sector as a “downside risk.” Our research suggests that real home price growth has already entered a cyclical downturn that is likely to intensify.
Scary stuff but at this point, I say to remain calm. Realistic and informed but calm…
A Shift to A Buyer’s Market?
As you can see, there are ample reasons to think we may see home sales and prices soften or even decrease. Which is why we are hearing some reports abut the housing market shifting to a buyer’s market.
I think this is a bit premature but let’s look at the opinions of 2 real estate economists:
Zillow’s Chief Economist Dr. Svenja Gudell said:
These seller challenges don’t indicate we’re suddenly in a buyers’ market – we don’t expect market conditions to shift decidedly in favor of buyers until 2020 or later. But buyers certainly are starting to balk at the rapid rise in prices and home values are starting to grow at a less frenetic pace.
Realtor.com’s Chief Economist Danielle Hale said:
The signs are pointing to a market that’s shifting toward buyers. But, in most places, we’re still a long way from a full reversal.
This is only 2 opinions but if we look at the results of the Pulsenomics survey of over 100 experts, we see that we still have about 2 years before we enter a buyers market:
The housing market does not change over night and more importantly, local conditions are often very different than the national reports we hear on the news. This is why it is important for anyone buying or selling real estate to work with an experienced local Realtor.
To really see the housing market shift to a buyer’s market, we would need to see a dramatic inventory increase and this could lead to a softening of home prices.
You need to understand there is a difference between decreasing home price growth and decreasing home prices. There is a BIG difference and understanding the difference can save you thousands!
Home price growth refers to how fast or slow home prices are increasing. It does not mean that home prices are falling!
In the pst few years, US home prices have increased 6% annually. If you bought a home for $100,000 at the beginning of last year and it’s value increased like the national average, it would be worth $106,000 by the end of the year.
The pace of home price growth is predicted to be around 5% by the ned of this year and drop to between 4% and 5% next year. The decrease in home price growth will mean that home prices are softening or weakening but does NOT mean that home prices are falling!
Plus, you have to remember there is a big difference between statistics about the US housing market and what is happening in your local real estate market. You can keep up on what is happening in our area by reading the Anderson County SC Real Estate Market Reports
Most Home Owners Rather Remodel Than Move
Given a choice between spending a fixed amount of money on a down payment for a new home or using that same money to fix up their current home, 76 percent of Americans will choose to renovate, according to the new Zillow Housing Aspirations Report.
For people who are 55 years or older, the share is even higher: 87 percent. And retirees are higher still, with 91 percent saying they’d stay put and upgrade rather than use the same money toward a down payment.
This will make the lack of inventory in many areas worse. Despite the huge potential profit, many home buyers simply prefer to stay and update or remodel their homes to fit their current and future lifestyle.
At the national level, housing affordability is up from last month but down from a year ago. Mortgage rates rose to 4.78 percent this August, up 14.1 percent compared to 4.19 percent a year ago.
NAR calculates affordability by assuming a 20% down payment and a 25% qualifying ratio (principal and interest payment to income). Only YOU can decide what is truly and safely affordable for you.
The Golden Years May Not Be Golden for Many
Inadequate retirement accounts will cause 8.5 million middle-class older workers and their spouses to be downwardly mobile, falling into poverty or near poverty in their old age. 40% of older workers and their spouses will be downwardly mobile in retirement.
Planning ahead now by becoming a home owner could help secure your financial future. You will always need to budget for taxes, insurance and repairs/maintenance but owning your home free and clear when you retire will remove a huge financial burden.
You Better Shop Around
According to the recent PenFed Credit Union National Mortgage Survey, 65% of homeowners didn’t shop around for a mortgage.This is a huge mistake as you could save thousands of dollars on a mortgage by taking to several different mortgage lenders to explore your options.
The good news is that the survey also found that 37% of adults and 52% of millennials are looking to buy a home in the next two years. PenFed also said that 48% of those who do not currently own will start looking at buying a home in the next couple of years.
When Shilling Talks You Better Listen
From Gary Shilling in Business Insider:
There’s nothing on the immediate horizon that says that you’ve got a problem, and what usually happens is bear markets are associated with recessions, and they’re caused by two things. One is the Fed tightens; they never intend to precipitate a recession, but by my count, 11 out of 12 times in the post-World War period they’ve gotten a recession.
Not only is the Fed tightening but they are also selling off their massive portfolio that was caused by Quantitative Easing. Long time readers know that I believe the Fed and QE helped the banks and Wall Street more than the average American.
Can’t Get No Satisfaction
According to a recent Gallup poll, 38% of Americans are satisfied with the way things are going in the US. Compare this to the 59% that are unsatisfied and you can see the upcoming elections could prove interesting.