August 9, 2022 – Dog Days of Summer. In a normal year, the real estate markets die down during what we call the “dog days of summer.”
Dog Days of Summer. In a normal year, the real estate markets die down during what we call the “dog days of summer.” The issue is, we have not had anything akin to a normal year in quite a few years. Low interest rates, the pandemic and the ensuing real estate boom eliminated seasonality from the equation. So, as the real estate market has slowed down this summer, an interesting question has arisen.
That question is—how much of the slowdown we are witnessing is caused by decreasing affordability and how much is caused by seasonal factors? We can say that higher home prices, in conjunction with higher interest rates, definitely have had a dampening effect upon the markets. But we cannot put a finger on the effect of the typical summer slowdown. Certainly, as the pandemic has worn on—so many more have taken advantage of their new-found freedom to get the “Heck out of Dodge.”
We will only know if seasonality is a factor when September comes, and the kids go back to school. Interest rates have also come down a bit from their highs and the market slowdown has eased the hot levels of appreciation. Thus, while affordability will not be as it was during the height of the pandemic, it could get marginally better. Only time will tell, as we have just about another month of the dog days. Meanwhile, the job market is not taking any time off this summer with over 500,000 jobs added last month.
Weekly Interest Rate Overview
The Markets. Mortgage rates fell again in the past week, though they rose after the survey period came to an end. For the week ending August 4, 30-year rates fell to 4.99% from 5.30% the week before. In addition, 15-year loans decreased to 4.26% and the average for five-year ARMs declined to 4.25%. A year ago, 30-year fixed rates averaged 2.77%, more than 2.00% lower than today. Attributed to Sam Khater, Chief Economist, Freddie Mac, “Mortgage rates remained volatile due to the tug of war between inflationary pressures and a clear slowdown in economic growth. The high uncertainty surrounding inflation and other factors will likely cause rates to remain variable, especially as the Federal Reserve attempts to navigate the current economic environment.” 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
It is not a seller’s market anymore and if you are on the hunt for your dream home, a second home or an investment property, consider the broader menu of seller concessions — not just sales price. Think big. Ask for a lot. Sellers can just say yes, no or monkey in the middle. For example, consider a permanent rate buydown. Assume you can get a 30-year fixed rate at 5.5% without points. The principal and interest payment would be $3,407 on a $600,000 loan. At 4.875%, the payment would be $3,175, or more affordable by $232 per month. This concession would cost the seller roughly 2% of the loan amount, or $12,000. But it could potentially save the buyer $83,520 over the life of the loan. Homebuilders are especially open to a cornucopia of concessions if it doesn’t mean discounting the sale price. They want their closed sales comps to remain steady to make sure discounts don’t torpedo pricing for an entire phase of freshly built homes. Freddie Mac allows “interested party contributions” of up to 3% of the sales price for home buyers making down payments of less than 10%. Such “IPC’s” include home seller, builder and real estate agent concessions. Freddie also allows up to 6% in IPC concessions for loans with 10-25% down, and up to 9% for buyers putting more than 25% down. Freddie allows a maximum 2% IPC for investment properties, regardless of down payment size. Other potential concessions arise after your home inspection. For example, the buyer and seller can agree to a seller’s credit for roof and plumbing repairs, which can be completed after escrow closes. Say the cost of repairs totals $15,000. You could convert that into closing cost credits or reduce the sales price by that amount – if the appraisal does not require the repairs before closing. How about asking the seller to carry back a second “piggyback” mortgage to qualify for a decent-sized home instead of living in a shoebox? This could garner the buyer cheaper payments and avoid mortgage insurance. Seller financing could provide an additional bonus for some home sellers: a capital gains tax delay. “Seller delays any potential capital gains tax on the $75,000 until the buyer repays the principal balance,” said Jeff Hipshman, CPA partner at Eide Bailly LLP. “Any interest payments from the buyer to the seller are taxable to the seller as ordinary income.” If you are angling for concessions in addition to getting your best price, collaborate with your mortgage loan originator and your real estate professional — especially if you are focused on a permanent mortgage rate buydown. Source: Orange County Register
For nearly one-third (31%) of millennial first-time homebuyers, the ability to save extra money during the coronavirus pandemic helped them accumulate the money needed for a down payment. That’s according to a report from Redfin, the technology-powered real estate brokerage, which surveyed more than 1,500 Americans who plan to buy or sell a home in the next 12 months. More than 100 millennial first-time homebuyers responded to the question about down payments. Forty-eight percent of millennial first-time buyers who took Redfin’s survey saved money directly from paychecks for their down payment on a home, the most commonly cited method. It’s followed by the ability to save extra money during the coronavirus pandemic (31%), working a second job (27%), cash gifts from family (20%), and selling stock investments (19%). Thirty-seven percent of all homebuyer respondents (regardless of age) are purchasing a home later than originally planned because of the pandemic and 32% are buying a home sooner than originally planned. Source: PRNewswire
Fierce competition in the industry didn’t stop REALTORS® from increasing their transaction sides and income over the last year, according to the National Association of REALTORS®’ 2022 Member Profile. The booming housing market has prompted more people to pursue a real estate career, as NAR’s membership rose to an all-time high of 1.56 million in 2021, up from 1.49 million in 2020, the report shows. That marks significant growth from a decade ago when membership stood at just over 1 million. That means real estate pros may have to compete more for customers. But it’s not the competition that REALTORS® cite as the top challenge blocking them from closing more sales—it’s the national inventory shortage, the NAR survey shows. Still, the typical member had 12 transaction sides in 2021, up from 10 in 2020, though COVID-19 lockdowns in 2020 need to be taken into consideration. Also, the typical sales volume rose from $2.1 million in 2020 to $2.6 million in 2021, according to the survey. With more transactions under their belts, REALTORS®’ median gross income has ticked up as well, rising from $43,300 in 2020 to $54,300 in 2021. Experience level tends to matter greatly when it comes to income level. Fifty-seven percent of members who have two years or less of experience earned less than $10,000 in 2021, the report shows. On the other hand, 45% of members with more than 16 years of experience earned more than $100,000. Source: NAR