May 24, 2022 – The Times — They Are Changing. There are certainly a lot of changes going on in the markets. The catalyst of these changes are rising interest rates.

Economic Commentary

The Times — They Are Changing. The title of this commentary could be classified as an understatement. There are certainly a lot of changes going on in the markets. The catalyst of these changes are rising interest rates. Though inflation is the main culprit blamed for escalating interest rates, the fact that the economy has almost fully recovered from the pandemic-induced recession means that interest rates were likely to rise this year in any case. But certainly, the increases would have been much more gradual without the influence of inflation.

The stock markets have also reacted to rising rates and inflation. Early in May, we reached deep into correction territory. This correction has also been sharper and faster than expected. Moving to the real estate market, it is here that changes typically happen more slowly. It takes more time to consummate a real estate transaction, while you can sell a stock in seconds. The real estate market has been in a “seller’s market” territory for quite some time due to excess demand and a shortage of inventory.

It is here that we have a divergence of factors. For one, we do expect buyer demand will fall as higher interest rates and higher home prices have placed a double whammy on affordability. But that does not mean there will be more listings coming on the market. Higher interest rates are deterring many sellers because they hold lower interest mortgages on their home. Thus, we expect inventory to rise more slowly because of less demand, and hopefully that turns into a more balanced market. Just keep in mind that things can change again on a dime. For example, a stock market rebound can come at any time, especially if interest rates ease back a bit. But the times – they are a changing.

Weekly Interest Rate Overview

The Markets. Mortgage rates eased a bit in the past week. For the week ending May 19, 30-year rates fell to 5.25% from 5.30% the week before. In addition, 15-year loans decreased to 4.43% and the average for five-year ARMs climbed to 4.08%. A year ago, 30-year fixed rates averaged 3.00%, over 2.00% lower than today. Attributed to Sam Khater, Chief Economist, Freddie Mac, “Economic uncertainty is causing mortgage rate volatility. As a result, purchase demand is waning, and homebuilder sentiment has dropped to the lowest level in nearly two years. Builders are also dealing with rising costs, meaning this posture is likely to continue.”   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

New research from Realtor.com indicates that during the first quarter of 2022, 40.5% of prospective buyers viewed home listings located outside of their current state, compared to 36.4% in 2021 and 33.4% in 2020. Those that looked to move to another metropolitan area, including within their own state registered even higher: in the first quarter of 2022, 59.7% of all Realtor.com listing page views came from shoppers searching for homes outside of the metropolitan area where they live. This number is up an additional 4.6% this year. “After two years of pandemic remote work, offices have started to reopen, but instead of seeing a slowdown in the number of people interested in homes out of state, we’re seeing an acceleration,” said Realtor.com Chief Economist Danielle Hale. “Taking a closer look at the top destinations, we see some very different trends driving the desire to live out of state and home shoppers’ diverse needs. First, affordability remains a key focus for buyers, with demand for less expensive areas surging in recent months as climbing inflation and mortgage rates compound cost pressures faced by buyers. Next, flexibility enabled by broader adoption of remote work has fueled interest in sunnier climates, such as the Sun Belt. And finally, some people are simply ready to get back to normal, with some buyers’ desire to live downtown lifestyles driving two big cities into the top 10.” While people are expected to have a better chance to buy a home in 2022 due to increasing supply, “rapidly intensifying cost pressures” are creating a greater sense of urgency for many buyers to find a home amid increasing inflation and interest rates. Source: Realtor.com

According to the Leading Indicator of Remodeling Activity (LIRA) released by the Remodeling Futures Program at the Joint Center for Housing Studies of Harvard University, expenses for improvements and repairs to owner-occupied housing stocks are expected to increase throughout 2022 and into early 2023 – but gradually, at a decelerating pace. The LIRA projects year-over-year increases in residential renovation and maintenance spending will peak at 19.7% in Q3 of this year before sliding downward to 15.1% in Q1 of 2023. “Massive increases in house price appreciation and the resulting levels of tappable home equity will continue to support remodeling activity this year and into next,” says Carlos Martín, Project Director of the Remodeling Futures Program at the Center. “Many other market indicators including existing home sales, renovation permitting, and retail sales of building materials also continue to grow at high, albeit slowing, rates.” Year-over-year spending growth held steady at 1-3% from Q4 of 2019 to Q4 of 2020 followed by a gradual acceleration to 11.5% in Q1 of 2022; growth is projected to accelerate faster to a peak of 19.7% through Q3 of 2022 before softening to 15.1% in Q1 of 2023. Annual spending levels are expected to increase from $391 billion through Q1 of 2022 to $449 billion through Q1 of 2023. “The level of annual expenditures for home improvements and repairs is set to expand to nearly $450 billion by the first quarter of 2023,” says Abbe Will, Associate Project Director of the Remodeling Futures Program. “Yet, the rising costs of project financing, construction materials, and labor, as well as growing concerns about a broader economic slowdown or recession may further slow remodeling growth.” Source: MReport

According to the National Association of Realtors (NAR), there has been a renewed interest in homes sold with green features, as nearly 50% of Realtors surveyed have assisted clients in buying or selling a home with green features, up from 32% from the previous year. NAR’s 2022 Realtors and Sustainability Report surveyed NAR members nationwide regarding sustainability issues currently facing the real estate industry, and found that roughly two out of three agents and brokers see value in promoting energy efficiency in listings. Sixty-three percent of those surveyed said that energy efficiency promotion in listings was very or somewhat valuable, while 35% reported that their multiple listing service (MLS) features green data fields. “Sustainability continues to play a growing role in consumers’ purchasing decisions, and this is becoming even more prevalent in the real estate market,” said NAR President Leslie Rouda Smith, a Realtor from Plano, Texas, and a broker associate at Dave Perry-Miller Real Estate in Dallas. “With the residential property market, in particular, home buyers have expressed increased interest in eco-friendly factors like solar panels and energy efficiency.” Roughly three out of four Realtors–77%–said that properties with rooftop solar panels were available in their market. Thirty-six percent said that homes with solar panels increased the perceived property value, compared to 30% that said they had no effect. The features believed to be most important to clients included windows, doors, and siding (36%), proximity to frequently visited places (38%), a comfortable living space (35%), and a home’s utility bills and operating costs (20%). More than one out of three respondents–34%–said they were very or somewhat concerned about the impact of extreme weather events. Source: DS News