Change Is Here – Real Estate Market Update

If a real estate agent fell asleep just after the New Year and just woke up today Rip van Winkle style, they might wonder how we got here. Based on the Freddie Mac survey, the average rate for a 30-year fixed mortgage is up more than 2% since January 6 of this year.

It’s been a really accommodating interest rate environment for a long time now. The change that was bound to come is now upon us. How should you and your clients react? First, I find that a deep breath never hurts. Once you’ve done that, read on.

If you’ll remember, the Federal Reserve increase the federal funds rate by 0.25% in March, with the intention of using this as one move to tame inflation. Now, they’ve increased the federal funds rate by 0.5% at their latest meeting, planning similar hikes several more times throughout the rest of the year.

Although not directly correlated, mortgage rates and the federal funds rate tend to follow the same general trajectory because the Fed funds rate is the rate at which lenders borrow from each other. If it becomes more expensive for banks to borrow, this cost is generally passed through to clients. That’s a bit of an oversimplification because banks also compete for business, so that rates at every institution are a little different, but if the federal funds rate goes up, rates are rising for clients.

The other thing the Federal Reserve announced was its plan for reduction of assets on its balance sheet. As part of this, it’s going to be selling $35 billion worth of mortgage-backed securities (MBS) back into the market each month until they are no longer on the balance sheet. Starting in June, $17.5 billion worth of MBS will be sold per month for 3 months before ramping up to the full pace.

Because MBS are directly tied to mortgage rates, it’s worth going over the effect that this will have. The bottom line is that rates are going to continue to rise, but context never hurt anyone, particularly when it comes to educating clients.

At the beginning of the pandemic, the Federal Reserve followed a playbook that it’s utilized in some other major recent recessions. Because housing makes up such a big part of the economy, the Federal Reserve went in big on buying mortgage bonds. This meant sellers of those bonds had a willing buyer even at a lower yield, enabling them to offer lower mortgage rates.

When borrowing is cheap, it encourages people to spend money, which allows for the hiring of people to produce goods and services. This is what makes lowering interest rates and buying mortgage bonds such an effective tool for ending recessions.

However, cheap borrowing can also mean people have more money to offer. This has led to the price of housing rising better than 20% according to the Case-Shiller Home Price Index since the same time a year ago. This has been a major contributor to inflation, so that’s one of the reasons for making the move to sell now.

At the same time, prices aren’t likely to come down right away in the housing market. According to the latest data on existing home sales from the National Association of REALTORS^®, supply in the market sits at just 2 months based on the current pace of sales. A market is considered in balance once it’s reached 6 months’ supply.

Moreover, the typical home was only on the market for an average of 17 days. It’s a seller’s market and there can be no doubt.

Rising interest rates along with prices that aren’t coming down isn’t an ideal situation, but we’ve got some tips and tools that should help put your clients in the best possible position.

We highly recommend every client gets a Verified Approval.¹ This is a full preapproval backed by a credit check as well as the client’s income and asset documentation. Even better, we’re proud to offer RateShield^®.² This is an option that allows clients to lock their rate for up to 90 days while shopping for a home. If rates go up, they have the security of their locked rate. If rates fall, they can lower the rate once in that 90-day period.

Together with your reassuring guidance on things like proper budgeting and patience, this will give your clients the tools to feel confident in their purchase process.

As always, this portion of the report is supplemented with analysis from our friends at Econoday.³

Consumer Price Index (CPI)

Inflation continues to rear its ugly head. Prices rose 8.5% compared to the same time last year after going up 1.2% in March. When food and energy were taken out, prices were up 0.3% for the month and 6.5% since last March.

In something that will be no surprise for those of us in real estate, shelter was the biggest reason for the CPI uptick, it’s up 0.5% for the month and 5% for the year.

Retail Sales

Total retail sales were up 0.5% overall, while there was a 1.1% increase when vehicle sales were excluded. When taking out vehicles and gas, the gain was just 0.2%.

Looking at the categories important to housing, sales of furniture and home furnishings were up 0.6%. Turning to sales at building and garden equipment stores, these were up just under 0.5%.

New Residential Construction

The number of housing completions in March fell 4.5% to a seasonally adjusted annual rate of 1.303 million. This is 13% below last year. Single-family completions were down 6.4% at a rate of 1 million. There were 292,000 multifamily units in buildings with 5 units or more completed.

Turning to starts, these were up 0.3% at 1.793 million on an annual basis. It’s 3.9% higher than a year ago. The bad news is that single-family starts were down 1.7% at 1.221 million. There were 574,000 multifamily units completed.

Building permits were up 0.4% at a seasonally adjusted annual rate of 1.865 million, which is 6.7% higher than the same time a year ago. Meanwhile, authorizations on the single-family side were down 4.8% at 1.205 million. Finally, permits pulled for multifamily units were at a rate of 672,000 in March.

Existing Home Sales

Existing home sales came in at an annual rate of 5.77 million in March, which has fallen 2.7% on the month and is down 4.5% on the year. However, it’s worth noting that the reason for these drops is that we were coming off an incredibly hot market last year. As noted earlier, supply in the market remains incredibly thin at 2 months.

What’s more, the average home is only on the market for 17 days. The median price for an existing home was $375,300, up 4.5% in March and 15% for the year.

Case-Shiller Home Price Index

Home prices were up 2.4% in February on both a seasonally adjusted and unadjusted basis. Meanwhile, they’ve risen 20.2% overall, a record. This is a rolling 3-month average, so the immediate impact of higher mortgage rates may not necessarily be highly reflected in this data, but right now, a lack of supply is outweighing everything.

FHFA House Price Index

Case-Shiller looks at all home prices across the country, whereas the FHFA index only covers transactions backed by conventional mortgages. Additionally, it’s a month-to-month look rather than a 3-month average. Still, prices in this index were up 2.1% on the month and 19.4% since February of last year.

Consumer Confidence

Overall consumer confidence was up 0.1 point in April to come in at 107.3. On the downside, plans to buy a home are stagnant at a pretty low level according to this index given the uptick in mortgage rates.

New Home Sales

New home sales were down 8.6% at 762,000 in March. The good news was that sales in February were revised upward to 835,000. Still, overall sales are down 12.6% from a year ago. It’s helpful to remember that last year was insane in terms of the pace of sales.

The good news if you’re a buyer is that things might be tilting in your direction, in comparison to existing home sales. Supply is at 6.4 months given the current pace of sales. With that said, prices aren’t reflecting that yet. They were up 3.6% in March to a median of $436,700, up 21.4% compared to last year at the same time.

Pending Home Sales Index

The number of homes under contract for sale fell in the month of March by 1.2% to an index level of 103.7. Because this is a future indicator for existing home sales, one would expect them to be lower in April based on this report. Higher mortgage rates are having an effect.

Gross Domestic Product (GDP)

As a whole, the economy shrank in the first estimate of the first quarter by 1.4%. This had a lot to do with businesses building up inventories in Q4 and not sustaining the same level in the first quarter to go along with a high level of imports. However, there was a 2.7% increase in consumer spending, which is a sign of strength.

For those of us in the real estate and mortgage industries, the great news is that residential spending was up 2.1% in the first quarter.

Mortgage rates are going up. There’s no doubt about it. Encourage your clients to take advantage of RateShield so they can lock their rate while they shop for a home.

According to Freddie Mac, the average rate on a 30-year fixed mortgage with 0.9 points paid in fees was 5.27%, up 17 basis points on the week and rising from 2.97% the same time a year ago.

Looking at shorter terms, the average rate on a 15-year fixed mortgage with 0.8 points was up 12 basis points at 4.52%. It’s risen from 2.3% last year at this time.

Finally, the average rate on a 5-year treasury-indexed, hybrid adjustable-rate mortgage was up 18 basis points at 3.96% with 0.2 points paid. This is up from 2.7% last year.

It’s a vastly different housing and mortgage market than it was even a couple months ago, but you can give your clients the appropriate tools to succeed in their home buying journey. Go get those rates locked! Have a great month!

¹ Your client’s participation in the Verified Approval program is based on an underwriter’s comprehensive analysis of their credit, income, employment status, debt, property, insurance and appraisal as well as a satisfactory title report/search. If new information materially changes the underwriting decision resulting in a denial of the credit request, if the loan fails to close for a reason outside of Rocket Mortgage’s control, or if the client no longer wants to proceed with the loan, their participation in the program will be discontinued. If the client’s eligibility in the program does not change and their mortgage loan does not close, they will receive $1,000. This offer does not apply to new purchase loans submitted to Rocket Mortgage through a mortgage broker. This offer is not valid for self-employed clients. Rocket Mortgage reserves the right to cancel this offer at any time. Acceptance of this offer constitutes the acceptance of these terms and conditions, which are subject to change at the sole discretion of Rocket Mortgage. This is not a commitment to lend. Additional conditions or exclusions may apply.

² RateShield Approval is a Verified Approval with an interest rate lock for up to 90 days. If rates increase, your rate will stay the same for 90 days. If rates decrease, you will be able to lower your rate one time within 90 days. Please contact your Home Loan Expert for additional information. This offer is only valid on certain 30-year purchase loans. Additional conditions and exclusions may apply.

³ Important Legal Notice: Econoday has attempted to verify the information contained in this calendar. However, any aspect of such information may change without notice. Econoday does not provide investment advice, and does not represent or warrant that any of the information is accurate or complete at any time. Copyright 2022 Econoday, Inc. All rights reserved.