April 19, 2022 – Inflation We Don’t Complain About. There is one area of inflation we don’t hear complaints about.

Economic Commentary

Inflation We Don’t Complain About. High inflation is on the minds of everyone as interest rates rise and everything from gas to rent costs more day-to-day. But there is one area of inflation we don’t hear complaints about, especially from a specific group of the population. That area consists of housing prices. The specific group consists of homeowners. If you own a home today—you look at the home sales around you and marvel at how much more your home is worth.

Yet, though we like to blame the price of oil, housing inflation is a more important component of inflation than gas prices. That is because housing payments, including rent and mortgages, are a greater portion of our paycheck. Rising housing prices were masked as a component of inflation for a time because interest rates were falling to historic lows at the same time, but now interest rates are higher – though they are still historically low.

Higher housing prices and rising interest rates are causing decreasing home affordability and rising rents as well. Even property taxes are going up due to the higher house values. However, this issue does not affect everyone equally. If your home is paid off or you locked in a low rate in the past few years, you have inflation protection. And that includes the majority of homeowners. If you are renting and/or aspiring to purchase, you have none of this protection. The next question is – how long can home prices keep rising at this pace? The answer to this question will give us a clue as to the future of inflation. More on this question in the coming weeks.

Weekly Interest Rate Overview

The Markets. Mortgage rates hit their highest level in a decade in the past week.  For the week ending April 14, 30-year rates rose to 5.00% from 4.72% the week before. In addition, 15-year loans increased to 4.17% and the average for five-year ARMs also climbed to 3.69%. A year ago, 30-year fixed rates averaged 3.04%, almost 2.00% lower than today. Attributed to Sam Khater, Chief Economist, Freddie Mac, “This week, mortgage rates averaged five percent for the first time in over a decade. As Americans contend with historically high inflation, the combination of rising mortgage rates, elevated home prices and tight inventory are making the pursuit of homeownership the most expensive in a generation.”  Note: Rates indicated do not include fees and points and are provided for evidence of trends only. They should not be used for comparison purposes.

Real Estate News

Millennials comprise 43% of home buyers—the highest of any generation in the current market. Their numbers in real estate are growing, as last year, they comprised 37% of buyers. Millennials—consumers between the ages of 23 to 41 years old—are the most likely generation to use the internet to find a home they ultimately purchase as well as the most likely to use a real estate agent, according to a new study released by the National Association of REALTORS®, The 2022 Home Buyer and Seller Generational Trends report. “Some young adults have used the pandemic to their financial advantage by paying down debt and cutting the cost of rent by moving in with the family,” says Jessica Lautz, NAR’s vice president of demographics and behavioral insights. “They are now jumping headfirst into homeownership. While young buyers use new tech tools, they also use real estate agents at higher rates than other buyers to help find the right home and negotiate the terms of the transaction.” While millennials may be in the housing market in higher numbers, Generation X is buying the most expensive homes. Buyers in that group purchased homes at a median price of $320,000. That was higher than younger millennials (between the ages of 23 to 31), at a median of $250,000, and older millennials (ages 32 to 41), at $315,000. Baby boomers between the ages of 57 to 66 purchased homes at a median price of $301,000, while those between the ages of 67 to 75 purchased homes at a median of $295,000, according to NAR’s data. Source: National Association of REALTORS®

Some homeowners are turning to the equity in their current home to fund their next real estate transaction. Most homeowners who bought a home before 2020 have seen rapid appreciation and rising equity in their homes. A cash-out refinance is allowing them to use that equity to help fund their next purchase. They can take out a new mortgage loan for more than what they owe, and then use the cash to buy another property or to make a down payment on a new one. Cash-out refinances have traditionally been used to pay off debt or fund home renovations or repairs. But homeowners are finding they can also leverage them to complete their next home purchase. Homeowners with 20% or more equity are likely to be eligible for cash-out refinancing. Laura Agadoni writes for Motley Fool about how she used a cash-out refinance to fund her last rental property. But she acknowledges there are some risks to using cash-out refinances to buy real estate. She writes those can have higher costs. Also, borrowers will be starting a mortgage from scratch. Source: The Motley Fool

At the beginning of the COVID-19 pandemic, demand for condominiums plummeted 48% to lows not seen since 2012 as people fled high-density areas in an attempt to escape the virus. But that demand seems to have returned as the typical condo is now selling for $319,000 in February, up 22.7% from the beginning of the pandemic and 14.6% from a year ago. One of the traditional big benefits of condos was their affordability, and that is driving part of the demand the market is currently seeing. In comparison, a single-family home now costs $406,000, up 15.9% from last year and 34.9% from two years ago before the pandemic. Demand for condos is returning for two major reasons according to Redfin: COVID-19 cases are declining, and workers are returning to the office as protection orders expire after two years of working from home. “The condo market has bounced back,” said Chance Glover, a Redfin manager in Boston. “People are no longer afraid to live downtown, close to the crowds—and they often prefer it, because they’re close to the office and all the amenities of the city. Rising prices are pushing single-family homes out of reach for a lot of buyers, so condos are affordable in comparison.” The low available inventory for condos are also pushing prices up. The supply shortage has only worsened over the last year, as inventory has dropped 28% over the course of the last year and new condo listings dropped by 6.1%. This is compared to the inventory of single-family homes which fell by 14% and 2.5% for new listings over the same period. Source: Source: DS News