November 29, 2022 – The Home Stretch. Starwest Mortgage Economic, Interest Rate, and Real Estate Report

November 29, 2022 @ 5:11 pm Posted by starwest 0

Economic Commentary

The Home Stretch. With Thanksgiving behind us, we look ahead and realize that there is not much left of the year 2022. After two years of a pandemic, we had hoped that the world could get back to some semblance of normalcy in 2022, but perhaps we have forgotten what “normal” really is. Because 2022 did not seem like it was normal. Sure, there were signs of normalcy – restaurants were open and packed, traffic returned to the roads and while there were still shortages, you could find toilet paper. You just had to pay a lot more for it.

What kept us from this feeling of normalcy? Supply chain interruptions causing inflation to spike did not help. And the war in Ukraine exacerbated this situation. This led to higher interest rates which cooled the red-hot real estate market as affordability became the focus. Affording rents has been no less of an issue. All the while, the job market has stayed strong, which is the opposite of what we usually see when the Fed is trying to slow down the economy. Again, this is not normal.

Before we even mention 2023 – we still have more news to digest this year. For one, there is the jobs report to be released this Friday. Will we finally see the job market cool down? The Fed will be looking at these numbers carefully as they have their final meeting of the year scheduled in mid-December. Will we see a smaller rate increase this time around? That could signal the start of the end of the Fed’s tightening. No one is expecting a hard stop in this regard. But some light at the end of the tunnel as we close out 2022 would be nice.

Weekly Interest Rate Overview

The Markets. Rates eased a bit more in the past week. For the week ending November 23, 30-year rates fell to 6.58% from 6.61% the week before. In addition, 15-year loans decreased to 5.90%. A year ago, 30-year fixed rates averaged 3.10%, more than 3.25% lower than today. Attributed to Sam Khater, Chief Economist, Freddie Mac, “Mortgage rates continued to tick down heading into the Thanksgiving holiday. In recent weeks, rates have hit above seven percent only to drop by almost half a percentage point. This volatility is making it difficult for potential homebuyers to know when to get into the market, and that is reflected in the latest data which shows existing home sales slowing across all price points.” Note: Rates are provided for evidence of trends only. They should not be used for comparison purposes. Freddie Mac debuted new methodology for the survey on November 17. They are no longer reporting points and fees separately, nor reporting ARM rates.

Real Estate News

According to a recent study by First American Financial Corporation, there are fundamental and long-term drivers of housing demand that will position the housing market to rebound from the current challenging economic conditions, with one of those drivers being education. If education is the key to a more secure financial future, and in turn homeownership, then millennials are on the right track according to First American Deputy Chief Economist Odeta Kushi. “Millennials’ pursuit of higher education is good news for the housing market in the long run, because education is the key to unlock both greater earning power and, in turn, homeownership,” said Kushi. The millennial generation—those between the ages of 25 and 40 in 2021— is the largest living adult generation. While many millennials are well into their careers, others are still in school. According to First American’s research, millennials are the most educated generation in American history. Nearly 40% of millennials have a bachelor’s degree or higher, compared with 32% of Generation X, and 15% of baby boomers when they were the same age. Millennials have delayed key lifestyle decisions in favor of investing in the pursuit of education, pushing marriage and family formation to their early-to-mid-30s. Previous generations made these lifestyle choices in their 20s. Marriage and family formation are two of the most powerful motivations for homeownership, so these delayed lifestyle choices tend to also delay the desire for homeownership. However, when the time comes to become a homeowner, the earning power benefits of higher educational attainment are real. In 2020, millennials with a bachelor’s degree had a median household income of over $100,000, while those with at least a graduate degree had a median household income of over $120,000. Compare those income levels with the median household income of millennials with just a high school degree (or some college) of $60,000 and the earning power benefits of higher education are undeniable. The income difference is even more stark when compared with millennials with no high school degree, who have a median household income of $35,000, further underscoring the importance of and connection between educational achievement and earning power. Source: MReport

ATTOM released its third-quarter 2022 U.S. Home Equity & Underwater Report, showing 48.5 percent of mortgaged residential properties in the United States were considered equity-rich in the third quarter, up from 48.1 percent in the second quarter and 39.5 percent a year ago. The increase, while below other gains in recent years, still marked the 10th straight quarterly rise, and resulted in virtually half of all mortgage payers landing in equity-rich territory. The report found that at least half of all mortgage-payers in 20 states were equity-rich in the third quarter, compared to only seven states a year earlier. “Even though home price appreciation has slowed down dramatically in recent months, homeowners have continued to build equity,” said Rick Sharga, executive vice president of market intelligence with ATTOM. “And it appears that many of those homeowners have decided to stay where they are rather than purchase a new home, and are beginning to tap into that equity, as the number of home equity lines of credit issued in the second quarter of 2022 rose by 43 percent from the prior year.” The report also shows that just 2.9 percent of mortgaged homes, or one in 35, were considered seriously underwater in the third quarter, with a combined estimated balance of loans secured by the property of at least 25 percent more than the property’s estimated market value. The latest seriously underwater figure was the same as the 2.9 percent recorded in the prior quarter, but down from 3.4 percent, or one in 29 properties, a year ago. Overall, the report said, 94.3 homeowners paying off mortgages had at least some equity built up in the third quarter, compared to 92.9 percent a year earlier and 87.7 percent in 2020. That level rises further when accounting for homeowners who have paid off their mortgages. Source: ATTOM

Amid a volatile and rapidly changing housing market, many homebuyers and home sellers have unrealistic expectations about their prospects, according to a Zillow survey of real estate agents. The survey found many buyers and sellers believe the current volatility is temporary and that market conditions will fall back into their favor. The survey found among aspiring home buyers, the most common misconception (46%) is that home prices will fall significantly; while for sellers, the most common misconception (35%) is that despite the cooling market, bidding wars, offers above asking price and quick sales will return. “Buyers may think it’s better to wait out the market, but in reality, there is more opportunity in this market than I have seen in the past five years if buyers approach real estate as a long-term investment, ” said Michael Perry, an agent who leads The Perry Group, Salt Lake City, Utah. “If a buyer can purchase today, they have bargaining power, more options and more time to find the right home, instead of being rushed into a purchase they might regret.” Zillow research finds a rapid drop in home values is unlikely. Zillow’s home value forecast predicts a flattening of home values over the next year, with prices increasing 1.3% by September 2023. Fewer new listings will keep upward pressure on prices. The survey found buyers do appear to be taking advantage of today’s more favorable market. Nearly three in five agents say buyers are taking more time to consider a home (56%) and making offers below list price more often (55%). More than 40% of agents say today’s buyers are including more contingencies in their offers (43%), such as inspection and appraisal contingencies designed to protect buyers from unexpected costs. Source: The Mortgage Bankers Association

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