May 31, 2022 – Could Higher Rates Lead to Good News? There is no doubt that elevated rates are making things more expensive – especially in the real estate sector.

Economic Commentary

Could Higher Rates Lead to Good News? You can’t go a day without hearing that interest rates have risen this year and these higher rates are making it harder on the average consumer. There is no doubt that elevated rates are making things more expensive – especially in the real estate sector. Affordability challenges are moving some potential homebuyers to the sidelines, especially considering how much the price of homes have risen in the past few years.

Yet, there are some positive sides of higher interest rates. For one, lower rates have helped spawn the spike in home prices. And today’s rates will theoretically help cool the real estate market in this respect. Analysts are not exactly expecting home prices to fall, but if they stop rising so sharply because the market is more balanced, that would be a positive result for the long-run. This balance should bring more choices for homebuyers as the listing shortage could ease as well. Likewise, higher rates are aimed at lowering the inflation rate in other parts of the economy as well.

As the real estate market slows in response to the rise in rates, so should the economy. We are hoping for a soft landing after a robust recovery from the pandemic-induced recession. Much has been said about the Fed being late to the game when it came to fighting inflation. Now let’s hope they don’t over-react in the other direction. Keep in mind that, as the Fed raises short-term rates, long-term rates such as mortgages have already risen substantially. While mortgage rates could rise further, there is also a possibility that a soft landing could result in a leveling or even a slight easing of mortgage rates. Higher rates now with a goal of lower average rates in the long-run? That would be a great goal as well.

Weekly Interest Rate Overview

The Markets. Mortgage rates eased again in the past week. For the week ending May 26, 30-year rates fell to 5.10% from 5.25% the week before. In addition, 15-year loans decreased to 4.31% and the average for five-year ARMs climbed to 4.20%. A year ago, 30-year fixed rates averaged 2.95%, over 2.00% lower than today. Attributed to Sam Khater, Chief Economist, Freddie Mac, “Mortgage rates decreased for the second week in a row due to multiple headwinds that the economy is facing. Despite the recent moderation in rates, the housing market has clearly slowed, and the deceleration is spreading to other segments of the economy, such as consumer spending on durable goods.” 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

Bidding wars have grown common in home sales, but now they’re part of the process of renting an apartment as well. As demand outstrips supply, renters are trying to outbid others to get the property they want. “Properties are definitely in short supply, and demand is high,” Bruce Ailion, a real estate pro and attorney for Atlanta’s RE/MAX Town and Country, told realtor.com®. “For example, we had a property that had been renting for $1,260 a month. When the tenant left, we put the property on the market at $1,595 and had over 600 inquiries and close to 300 applications. That means we were underpriced for the current climate.” Some tenants will offer over the listed price to get their application ahead in the stack. Property owners may even return to applicants and ask them to submit their “highest and best offer” in such cases. Some owners are specifying in ads for their rental units that prospects should be ready for a bidding war and should submit their very highest offer. Austin, Texas, real estate pro Jasen Edwards told realtor.com® that in the first quarter of the year, rentals in the suburbs were sold out for 35% higher than the listed asking price. In the Los Angeles rental market, “we’re seeing bidding wars with 10-plus offers leading to leases going for substantially over ask,” Blake Stargel, a real estate professional with Compass, told realtor.com®. “This is now the norm. According to local agents, while 10% over asking is common, particularly hot properties can go for 1.5 times the listed monthly rent.” Source: realtor.com®

According to CoreLogic’s most recent Homeowner Equity Report, U.S. homeowners with mortgages saw their equity grow by 29.3% year-over-year in the fourth-quarter 2021, an average gain of $55,300 per borrower. Collectively, these homeowners (whose assets account for approximately 63% of all residential properties in the U.S.), gained more than $3.2 trillion in equity on a year-over-year basis. Homeowners nationwide have enjoyed an extended period of rising equity due to the ongoing growth of home prices. In Q4 2021, nationwide home prices climbed by 18% yearly, up from the 8% growth logged in Q4 2020, per CoreLogic. “Home prices rose 18% during 2021 in the CoreLogic Home Price Index, the largest annual gain recorded in its 45-year history, generating a big increase in home equity wealth,” said Frank Nothaft, the company’s chief economist. “For low- and moderate-income homeowners, home equity has historically been a major source of wealth.” Burgeoning property prices also have helped push down the number of homeowners with negative equity (borrowers who owe more on their mortgages than their homes are currently worth). Only 1.1 million homeowners nationwide (or 2.8% of all mortgaged properties) are currently underwater, the lowest level in more than 12 years, according to CoreLogic. The number of homes with negative equity was down 3% on a quarterly basis and down 24.9% year over year. Source: Scotsman Guide

The combination of the limited number of homes for sale, continued double-digit price increases and the sharp rise in mortgage rates is taking a toll on home sales across the United States. New home sales were down 12.6 percent in March compared with March 2021, according to the Census Bureau. Existing homes sales were down by 4.5 percent year-over-year in March, according to the National Association of Realtors (NAR). Pending sales, which refer to signed contracts that have yet to go to settlement, dropped by 8.2 percent in March compared with a year earlier, according to the NAR. The market is anticipated to slow further when April’s numbers are released because mortgage rates have continued to rise over the past month. According to Redfin real estate brokerage’s analysis, the average monthly mortgage payment for a home buyer was up 39 percent during the week ending April 24 compared with that same week in 2021, with the average 30-year fixed-rate loan at a 12-year high of 5.1 percent. Mortgage applications for purchase loans declined by 17 percent during the week ending April 22 compared with that same week one year ago, according to the Mortgage Bankers Association. Yet competition for homes continues in many markets because of the persistent shortage of homes for sale. Buyers who can still afford a mortgage at a higher rate are competing for the small number of homes for sale, although Redfin recently reported that bidding wars were less common in March than in February — 55 percent of homes sold for more than the listing price during that period, compared with 45 percent during that period in 2021. However, 14 percent of homes that sold had a price drop during the four-week period ending April 24, the highest percentage since the end of November and up from 11 percent in March 2022, and 9 percent in April 2021, according to Redfin. Source: The Washington Post