February 21, 2023 – The State of Housing. If there is any industry that is more cyclical than the housing industry, we would be surprised to hear about it.

Economic Commentary

The State of Housing. If there is any industry that is more cyclical than the housing industry, we would be surprised to hear about it. The housing industry is subject to multiple cycles, including seasonal cycles, economic cycles, and interest rate cycles. There are even demographic cycles caused by immigration and generations like the baby boomers and more recently the millennials. But no cycles were more pronounced than the pandemic and what we will call the pandemic hangover.

The pandemic caused the mother of all boom cycles. Fueled by record low interest rates, cash from stimulus and a booming stock market — and the rush to work from home – real estate sales and prices soared. And it was not like real estate was not already doing well, before this cycle hit. The pandemic “hangover” has brought the real estate market back to earth in the past several months. But we are seeing a market that is not like the Great Recession of 2008. As a matter of fact, that recession helped cause the factor we are seeing today. What is that?

Today we still have a housing shortage—both for renters and homeowners. For the decade after the Great Recession, we did not build enough homes to satisfy household formulation. To exacerbate matters, those who bought or refinanced at record low rates are not listing their homes. Thus, we still have more demand than homes. This is supporting home prices which have risen significantly throughout the pandemic. There is no rush of foreclosures like 2008 because homeowners have equity. The conclusion is that we have a market not like any other. Plus, as interest rates have fallen from their highs, more demand is coming back into the markets. Where will the inventory come from? Stay tuned….

Weekly Interest Rate Overview

The Markets. Rates moved up last week in reaction to continued strong economic news and the most recent inflation numbers. For the week ending February 16, 30-year rates rose to 6.32% from 6.12% the week before. In addition, 15-year loans increased to 5.51%. A year ago, 30-year fixed rates averaged 3.98%, more than 2.0% lower than today. Attributed to Sam Khater, Chief Economist, Freddie Mac, “Mortgage rates moved up for the second consecutive week. The economy is showing signs of resilience, mainly due to consumer spending, and rates are increasing. Overall housing costs are also increasing and therefore impacting inflation, which continues to persist.” 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

More than 80% of homeowners have no regrets about their most recent home purchase, according to a survey of over 1,000 homeowners from LendingTree. Some of these respondents bought their houses in the thick of the COVID-19 housing boom or shortly thereafter, while others purchased before the pandemic brought severe distortions to the homebuying market and the economy at large. Survey respondents who bought a home prior to the pandemic (and likely reaped the benefits of skyrocketing home values during it) are the most satisfied with their purchases. Eighty-six percent of those who bought a house at least five years ago reported having no regrets. But buyers who took action more recently were similarly content as well. Seventy-nine percent of homeowners who bought between two and five years ago said they don’t have any regrets about their purchase, as did 80% of homeowners who bought in the past two years. The high satisfaction rate, even during the hot market of the past few years, makes sense, according to LendingTree senior economist Jacob Channel. That’s despite heightened competition during the pandemic homebuying surge, which led to many house hunters doing whatever it took to buy a home, including paying above list price. In fact, 27% of homeowners who bought in the past two years paid more than list price, compared to just 5% of buyers five years ago. Additionally, 24% of buyers in the past two years skipped the inspection process, double the rate for those who bought at least five years ago. Channel doesn’t recommend skipping an inspection as “homebuyers can potentially miss negative aspects of a house that can end up costing them a lot of money in the future — or, in a worst-case scenario, render their home unlivable.” Source: Scotsman Guide

Fannie Mae and Freddie Mac have implemented an entirely new spectrum of Loan-Level-Price-Adjustments which will affect many purchasing or financing a home going forward. The new pricing regimen include a wide-range of changes —

• Higher pricing for Debt-to-Income Ratios over 40%.
• Lower pricing for investors and second homes.
• Lower pricing for those with low credit scores and/or those putting less down.
• Higher pricing for refinances, especially cash out.
• Higher pricing for some with higher, but not the highest credit scores – even if putting over 10% down.

The pricing schematic is very complex, which makes it important to get your prospects to a lender as quickly as possible. With more time to work, the lender has a better chance of optimizing their financial situation and the transaction to achieve the best price. In addition, for those who are already pre-approved, the pre-approval should be reviewed immediately. Sources: Fannie Mae and Freddie Mac

The student housing industry is positioned for solid performance in 2023 after posting record returns last year, the latest National Student Housing Report from Yardi Matrix said. “Momentum is strong heading into the new year, even as the effect of higher interest rates takes hold in the economy and has led multifamily rents to decelerate,” the report said. “Student housing remains largely unaffected, as the industry typically does better during times of economic volatility.” Just under half–48 percent–of beds at the top 200 investment-grade universities were already leased for the fall 2023 school year as of year-end 2022, representing a new record high for this time of year. Rent growth remained strong at 4.7 percent annual growth. “With over eight months to go until the start of the next school year, we anticipate 2023 being another record-breaking year for student housing performance,” Yardi said. But the report noted one caveat: highly selective universities with name recognition are maintaining their interest among incoming students, but smaller schools are having more difficulty with enrollment. The Hechinger Report said 48 colleges closed in 2022, “and a new wave of closures is expected this year.” “The slowing economy is having an impact on new student housing supply,” the report said. “With interest rates increasing, the development pipeline is contracting.” It said the development pipeline for the top 200 investment-grade universities (including planned, prospective and under-construction properties) decreased by more than 3,000 bedrooms from December to January, representing a 2.6 percent contraction. Source: The MBA