August 15, 2023 – The Real Estate Picture

Economic Commentary

The Real Estate Picture. What a strange real estate market. To our knowledge, never in our history have we had a situation in which the real estate market has slowed down only because there are not enough homes for sale. Typically, a slowdown in the real estate market is caused by a lack of demand; however, today we have plenty of buyers, just not enough homes. The higher interest rates we see today would usually suppress demand. Today’s high rates have caused somewhat of a pause in demand, but not enough to account for the dearth of listings.

The result of this unique market? For one, home prices are steady, or increasing slightly despite the slowdown in sales. Secondly, new home sales are flourishing because of the lack of existing homes for sale. All of this leads to the next question – where does the real estate market go from here? The future direction of interest rates will be one barometer of the future. We have gotten some good inflation news recently and another set of inflation reports are being released this week. If mortgage rates come down a bit as inflation abates, more existing homeowners may be inclined to list their homes. Mind you, we are not expecting rates to fall back to their lows of the pandemic. But rates that low will not be necessary to get potential sellers to act.

Life moves on. Baby boomers may be aging in place, but the oldest baby boomers are approaching 80 years old and that means their homes are coming onto the market. Remote work is enabling some who are younger to move into their retirement homes before retirement. Millennials who purchased starter homes are growing their families. Life moves on and so will homeownership. One thing for certain, even with more listings, there is a shortage of homes today and this will cause demand to be strong for the foreseeable future.

Weekly Interest Rate Overview

The Markets. Rates rose again last week as the economy continues to expand. For the week ending August 10, 30-year rates rose to 6.96% from 6.90% the week before. In addition, 15-year loans increased to 6.34%. A year ago, 30-year fixed rates averaged 5.22%, more than 1.5% lower than today. Attributed to Sam Khater, Chief Economist, Freddie Mac, “For the third straight week, mortgage rates continued creeping up and are now just shy of seven percent. There is no doubt continued high rates will prolong affordability challenges longer than expected, particularly with home prices on the rise again. However, upward pressure on rates is the product of a resilient economy with low unemployment and strong wage growth, which historically has kept purchase demand solid.”  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

The era of low mortgage rates is over. Embracing this reality will hasten your owning a house that meets your needs. Low rates flourished for 11 years, as the 30-year mortgage remained below 5% from February 2011 to April 2022. Since then, it has remained mostly above 5%, averaging 6.72% in June in Freddie Mac’s weekly survey. Some forecasters predict that rates will decline over the next 12 months. But they don’t foresee rates dropping below 5% anytime soon. If you want to buy a home, it’s tempting to be in denial that this is happening. But as you start to accept that we’re now in a time of higher rates, you can achieve closure (literally, when you close on the purchase of a home). “People are still working through their five stages of grief on this mortgage rate stuff,” says Lisa Sturtevant, chief economist for Bright MLS, the real estate listing service for the mid-Atlantic region. “And I think you have to reach the stage of acceptance at some point that certainly rates aren’t going to come down to where we were back during 2020 and 2021.” (When the median 30-year rate was 2.99%.) Fannie Mae, the Mortgage Bankers Association and the National Association of Realtors all forecast a gradual, moderate decline in mortgage rates through at least the first three months of 2024. Those three organizations are not alone in their prediction that mortgage rates will go down, but no one expects rates to plunge back to where they were two years ago. “I still think we’re going to see rates stabilizing and then moving slowly down this year and we’re going to end 2023 at 6%,” Sturtevant says. Danielle Hale, chief economist for Realtor.com, said in an email that “our base expectation is that it will take until the end of this year or early next year before mortgage rates get back to 6%.” It’s not realistic to put a home purchase on hold in the hope that mortgage rates will return to 2020 and 2021, when the 30-year mortgage held its breath under 4% the entire time. The median rate over the past 30 years is 5.77%. That’s the reality that we’ve returned to. If you want to buy your first home, you’re probably going to pay well above 5% on a 30-year mortgage, and you’ll have to establish a budget with that in mind. If you’re a homeowner, you dread giving up your current low-rate mortgage and getting a higher-rate loan on the next house. That’s understandable, but as Miranda Lambert once sang, “there’s freedom in a broken heart.” Source: MarketWatch

The first half of 2023 saw just 14 out of every 1,000 homes change hands — the lowest turnover rate in at least a decade, according to Redfin. The figure is down from 19 homes out of every 1,000 during the first six months of 2019, generally considered typical for the modern housing market, per Redfin’s data. A more active market would have a rate closer to 40 or 50 out of every 1,000 homes switching ownership. The turnover rate has slid most in the suburbs, where just 16 out of every 1,000 single-family houses with at least four bedrooms have changed hands from January to June this year. That’s down from 24 out of every 1,000 in the same six-month stretch of 2019. Put another way, buyers looking for large, suburban houses have roughly 33% fewer houses to choose from than four years ago. But small, urban single-family homes, which were already rare, have become the hardest to find, with a scant 11 of every 1,000 two- and three-bedroom houses in urban areas changing hands in the first half of the year. That’s down from 14 out of every 1,000 in 2019. The pandemic-era homebuying boom not only put many people in new homes (and into a window where they’re not looking to move again so soon), but also locked them into interest rates that are vastly below those offered in the current market. That intensified a shortage of resale listings that was already undersupplied before the pandemic. Consider that, in 2018, Freddie Mac estimated that the market needed some 2.5 million more homes to be built for demand to be met. Add in the rise of remote and hybrid work policies and the growth of investor purchases, and it’s easy to see the recipe for the current dearth of inventory that’s fueled this year’s record low turnover rate. Source: Scotsman Guide

Factors including supply chain issues and climate change could mean a 9% rise in homeowners insurance rates in 2023, to an average of $1,784 per year, data analysts predict in a new study by the research team at Insurify. In 2022, home insurance rose approximately 7%, to $1,636 per annum, from the previous year, according to analysts who based estimates on Insurify’s collected property data. “U.S. auto and homeowner insurance premium rates lagged behind the inflation rate in 2020 and 2021, laying the groundwork for the premium increases which occurred last year and will continue into 2023,” Mark Friedlander, Director of Corporate Communications at Insurance Information Institute, said, referring to Insurify’s study Insuring the American Homeowner. Multiple factors contribute to this rise in premiums, inflation, climate, material costs, supply chain issues, and increased claims for fire and water damage, to name a few, experts say. Homeowner credit score, ZIP code, and the coverage level needed also affect the cost. Colleen Finn, Managing Director at Boston-based insurer Plymouth Rock, said that those inflationary pressures that are driving up Americans’ grocery bills are now driving up homeowner insurance rates. “It is costing more and taking longer to repair your home, increasing the average cost per claim and ultimately the cost of homeowners insurance for everyone,” Finn said. Experts add that severe weather and natural disasters, such as floods, earthquakes, hurricanes and wildfires are also inflating coverage costs. Source: DSNews