November 14, 2023 – The Mortgage Rate Questions & Microunits

Economic Commentary

We will ask three mortgage questions this week. First, why are mortgage rates so high? We know why interest rates are high—the Federal Reserve has increased short-term rates to deal with stubborn inflation. But mortgage rates have risen far more than the rates on Treasuries. One reason? In addition to the Fed raising rates, they have also stopped purchasing mortgage instruments. This has created less demand for mortgages, increasing the spread between mortgages and Treasuries. Plus, the risk of a recession has increased with the Fed activity. Recessions can cause default rates on mortgages to rise — though we have seen no evidence of a recession thus far.

Second, how long will rates stay high? Because the economy has been so resilient, the Fed has coined the phrase “higher for longer.” Many had expected rates to fall at the end of this year and certainly by early 2024. Thus far it has not happened because the economy keeps expanding despite the Fed’s effort to cool things down. Thus, the Fed feels it must keep rates higher for a longer period of time. Plus, the federal budget deficits will continue to put upward pressure on rates as the Fed is flooding the markets with bond offerings to pay for this debt. Even if the economy slows, the Fed funding requirements will remain in the long-term.

Third, when will mortgage rates turn? Here is the good news. The Fed does not have to start lowering short-term rates for mortgage rates to fall. Just by softening their “higher for longer” rhetoric, the markets could move mortgage rates lower before any action by the Fed. Because of the wider spreads, the spreads between Treasuries and mortgage could narrow. No, we can’t predict when this will happen, but listening to statements by members of the Fed and looking for evidence of slower economic growth will give us all the clues we will need. We recently saw a drop in rates in reaction to the Fed keeping rates steady at their last meeting together with more moderate job growth in October. Could this be the turn? We shall see.

Weekly Interest Rate Overview

The Markets. The Freddie Mac Rate Survey showed a steep decline in mortgage rates last week, though most of the decrease occurred the previous week. After the survey was released, hawkish words from Fed Chairman Powell caused a reversal on Thursday of last week. For the week ending November 9, 30-year rates fell to 7.50% from 7.76% the week before. In addition, 15-year loans decreased to 6.81%. A year ago, 30-year fixed rates averaged 7.08%, less than 0.5% lower than today. Attributed to Sam Khater, Chief Economist, Freddie Mac, “As Treasury yields decline, the 30-year fixed-rate mortgage dropped a quarter of a percent, the largest one-week decrease since last November. Incoming data show that household debt continues to rise, primarily due to mortgage, credit card and student loan balances. Many consumers are feeling strained by the high cost of living, so unless mortgage rates decrease significantly, the housing market will remain stagnant.”  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

For singles and couples in their 50s and 60s, affordable housing is increasingly difficult to find in many areas. Yes, they are in their prime earning years — but few have enough saved for retirement, and those grappling with layoffs, health problems or simply low earnings may find themselves facing high rents, high interest rates and more. Living alone in a single-family house is challenging — financially and logistically — and apartments are increasingly pricey as well. From 2000 to 2022, median home prices increased 156% nationwide, while median rent prices increased 90%, according to Real Estate Witch. Are there other options? Two alternatives to single-family houses and apartments are becoming better known: microunits and co-living. Both address housing affordability problems with major trade-offs; in return for lower costs, you give up space or privacy. But there are benefits, too. Residents of these trendy experiments — largely a young crowd but increasingly a mix of generations — are finding wider social outlets and opportunities for expression beyond their own walls. And did we mention lower expenses? To balance the lack of personal space, buildings with both microunits and co-living arrangements generally have a common room with TV, a fitness room, a rooftop deck, and/or a “makerspace” for hobbies. These types of housing units are most often built in center cities and active suburbs, so shopping, services and transit should be close. “For older tenants who have downsized, the benefits are affordability and adjacency,” says Keith Schwebel, founder and CEO of KSNY, a developer and builder. “In these units, there’s no maintenance, no yardwork,” he adds. “The gym is in the building and no car is needed to get to shopping and attractions right in the neighborhood.” Source: MarketWatch

The U.S. Department of Housing and Urban Development (HUD) and the Administration have announced important updates that will help support the nation’s housing supply and improve housing affordability. The White House released a guidebook, Commercial to Residential Conversions: A Guidebook to Available Federal Resources, developed in partnership with HUD and other federal agencies, that will help communities and housing providers identify federal resources to finance the conversion of commercial properties to residential uses and mixed-use development. As part of this announcement, HUD released an updated notice on how its Community Development Block Grant (CDBG) funding, $10 billion of which has been allocated during this Administration, can be used to boost housing supply–including acquisition, rehabilitation, and commercial-to-residential conversions. This notice is the latest update on how to use CDBG resources to support the development of affordable housing. States and localities can also access up to five times their annual CDBG allocation in low-cost loan guarantees to fund projects such as the conversion of properties to housing or mixed-use development. “Addressing the affordable housing crisis requires an all-of-the-above approach,” said HUD Secretary Marcia L. Fudge. “The White House guidebook on commercial-to-residential conversions and the updated CDBG notice are just a few of the steps that HUD is taking to help our state and local partners to boost supply.” A new blog released by the Council of Economic Advisers finds that office vacancies have reached a 30-year high from coast-to-coast, placing a strain on commercial real estate and local economies. At the same time, the country has struggled for decades with a shortage of affordable housing units, which is driving up rental costs, and communities are seeking new ways to cut emissions, especially from existing buildings and transportation. “MBA shares the Administration’s commitment to increasing housing supply and appreciates its willingness to engage with us and the industry on ways to incentivize lenders and borrowers to rehab, repurpose, and convert more obsolete commercial properties into affordable rental housing and other usable spaces,” said Mortgage Bankers Association (MBA) President and CEO Bob Broeksmit, CMB. “Housing providers are grappling with higher interest rates and rising labor and construction costs at a time when our nation’s housing supply remains inadequate. The initiatives announced today should help facilitate more commercial-to-residential projects. We encourage state and local governments to ensure zoning laws, tax credits, and subsidies are aligned to take full advantage of these programs.” Source: DS News.

According to Zillow’s 2023 Consumer Housing Trends Report, first-time buyers now make up 50% of all home buyers, up from 45% a year ago and from 37% from 2021. The share of first-time buyers likely hasn’t been this high since around 2010, when there was a first-time home buyer tax credit. First-time buyers are making a resurgence in the market relative to repeat buyers due to the “lock-in” effect because they have mortgages under 5% and are unlikely to want to give up that rate. All of this is happening as inventory shrinks, but a significant rise in the share for first-time buyers does help explain what is driving demand as mortgage rates hover near 7%. “High mortgage rates and a shortage of inventory is keeping would-be repeat buyers in their current homes,” said Zillow senior population scientist Manny Garcia. “A greater relative share of first-time buyers is filling the gap, and they’re competing against each other for the limited number of affordable starter homes on the market.” It’s no secret that affordability is the greatest hurdle for first-time home buyers as the prices of homes continue their generally upward march. According to Zillow, it now takes nearly 12 years for a typical first-time homebuyer to save up for a standard 20% down payment, this number is up from nine years before the pandemic. In addition, most first-time homebuyers are utilizing at least two sources of income to finance their downpayment savings, so that means double jobs or two partners sharing the load. Buyers can also utilize down payment assistance to help themselves along. Nearly half of first-time home buyers are millennials (49%), a massive generation of adults ages 29–43 who are fueling fundamental housing demand as they hit their prime home-buying years. Gen Z adults between 18 and 28 years old are hot on their heels, making up more than one-quarter of all first-time buyers (27%). Source: Zillow