May 23, 2023 – The Tide is Turning. For a year we have had to deal with rising interest rates and lower home affordability.

Economic Commentary

The Tide is Turning. For a year we have had to deal with rising interest rates and lower home affordability. Much of this was expected after record-low interest rates helped fuel a real estate purchasing frenzy which resulted in prices increasing by double digits for the past few years. Fast forward to today, and home prices have held relatively steady in 2023, while interest rates have increased significantly, keeping home affordability low, especially for first time buyers.

The question is—has the tide turned? The Federal Reserve Board hiked short-term rates ten times over the past 14 months in response to a return to normalcy in the economy and a spike in inflation. Now the economy is slowing, and inflation has been waning as well for almost a year. Could the Fed cycle be over — and could we see lower mortgage rates during the second half of 2023? And if this scenario came to fruition, would this help homes become more affordable? There are three facets of affordability: personal income, mortgage rates and home prices.

Income has continued to rise over the past year, but has not kept up with the increase in home prices or interest rates and a slowing economy should result in smaller gains in personal income as well. Home prices have stopped rising, but they have not fallen as much as predicted because of the shortage of inventory. Thus, interest rates become a major factor in this equation. A significant move downward would definitely help with regard to affordability, with one caveat. The lower interest rates would have to encourage more sellers to list their homes in order to prevent home prices from starting to accelerate again under this scenario. In a perfect world, this would be where the tide would be heading.

Weekly Interest Rate Overview

The Markets. Rates continued to remain in a narrow range within the past several weeks. For the week ending May 18, 30-year rates fell to 6.39% from 6.35% the week before. In addition, 15-year loans remained at 5.75%. A year ago, 30-year fixed rates averaged 5.25%, more than 1.0% lower than today. Attributed to Sam Khater, Chief Economist, Freddie Mac, “The 30-year fixed-rate mortgage averaged 6.39 percent this week, as economic crosscurrents have kept rates within a ten-basis point range over the last several weeks. After the substantial slowdown in growth last fall, home prices stabilized during the winter and began to modestly rise over the last few months. This indicates that while affordability remains a hurdle, homebuyers are getting used to current rates and continue to pursue homeownership.” 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

In their ongoing quest for affordability, more buyers are turning to buying points to pull down the interest rates on their loans, according to a new study of Home Mortgage Disclosure Act (HMDA) by Zillow. Mortgage points, also known as rate buydowns and discount points, are an option available to homebuyers who wish to reduce their monthly payments by “buying down” the interest rate on their loan. The points are often presented in the form of an upfront fee; essentially, borrowers pre-pay interest to lower their rates and, therefore, the amount due every month for the life of the mortgage. The 2/1 buydown, a similar program that has likewise gained traction, lowers the interest rates on a loan for its first two years before reverting in the third year; usually, the rate is two percentage points lower in the first year and one percentage point lower in the second. Almost 45% of conventional primary home borrowers paid mortgage points in 2022, Zillow found. That’s far more than recent history, considering that interest rates from 2019 to 2021 were historically low. Just 27.3% of homebuyers opted to purchase points in 2019, while 28.4% and 29.6% of buyers in 2020 and 2021, respectively, paid mortgage points. As in previous years, borrowers in 2022 were more likely to buy points to purchase homes in the top and middle price tiers, likely because decreasing your interest rate has a larger effect if the principal on your mortgage is higher. Source: Scotsman Guide

Veros Real Estate Solutions released its first quarter VeroFORECAST, anticipating home prices will be flat overall for the next 12 months, a slight improvement from the 0.5% annual depreciation forecast one quarter ago. “It appears that we have turned the corner from overall slight annual forecast depreciation one quarter ago to an overall flat forecast now,” said Veros Chief Economist Eric Fox. “This suggests that we are now seeing a halt to the continually declining annual forecasts which started a year ago to one that is ticking back up, albeit slightly.” “We do not see a cataclysmic decline in house prices like so many in the national media are forecasting. The fundamentals for this to occur are simply not there like they were in 2007 or 2008,” Fox said. One key reason is that although demand has fallen significantly in many markets, supply remains stubbornly low. Buyers do not want to part with their current 3% mortgage interest rate and exchange it for a rate that is more than double if they don’t have to move.” Source: Veros

According to new research from home equity platform Point, most senior homeowners want to age in place, as nearly 90% of homeowners aged 50-80 years old say they want to remain in their homes for as long as possible. However, many are unprepared to pay for the necessary home improvements, according to Point’s Aging in Place Survey. Against a backdrop of record home equity in the U.S., paying for improvements like no-barrier entryways and handle bars in bathrooms should be easily accessible. However, only 17.8% of homeowners said their home was completely ready for them to age in place. In addition, many seniors expressed worry about high-interest rates and are concerned about taking on debt. Seniors living on a fixed income may not even qualify for products without cash on hand, pointing to an overall unpreparedness in getting their homes ready to age in place. Almost one-third of homeowners who want to age in place said they don’t know how to pay for necessary improvements, despite anticipating thousands of dollars in costs. “Not surprisingly, an overwhelming number of senior homeowners want to age in place. But it’s more telling how many appear to be financially unprepared to make necessary renovations,” said Amanda Woolley, Point’s head of communications. “Homeowners may be underestimating the financial impact of transitioning their home from its current state to something that’s more appropriate for their long-term needs. In addition, homeowners might not be aware that they have the means to tackle this challenge with the equity in their home without taking on any more debt.” Source: DSNews