September 12, 2023 – Just When You Thought It Was Safe

Economic Commentary

We always say that predicting the future is futile. This year is no exception. The analysts were expecting a recession sometime this year. It did not happen. They also expected interest rates to start easing down as the year went on. Instead, as the second half of the year began, interest rates started rising again. By mid-August mortgage rates hit their highest point since November of last year. So much for paying economists big money to give us a glimpse of the future. You might have to go to the weatherman to get predictions this far off.

Speaking of the weather, there is no doubt that climate change is one of the main factors contributing to the inflation we are experiencing. This is especially true in the real estate sector where insurance rates are rising, especially in certain states. Hurricane Idalia is just the latest event to cause damage costing billions of dollars. And the hurricane season has started to heat up. Thus far, people are still flocking to areas subject to storms and wildfires, but evidence is starting to roll in that the risk of climate change is starting to factor into the decision of where to purchase a home.

Going back to the issue of interest rates, most economists are still expecting lower rates on the horizon. Though the horizon has been moved out somewhat. It will be interesting to see if the present increase in rates is reversed this fall or this will be the new normal until rates start falling. We will make this somewhat “safe” prediction about the future. The longer rates stay elevated in the Fed’s quest to calm inflation, the greater number of homeowners who will be refinancing in the future. Which is why so many are using this quote recently – Marry the house, but date the rate!

Weekly Interest Rate Overview

The Markets. Rates eased last week, but reversed course at the end of the survey period. For the week ending September 7, 30-year rates fell to 7.12% from 7.18% the week before. In addition, 15-year loans decreased to 6.52%. A year ago, 30-year fixed rates averaged 5.89%, approximately 1.25% lower than today. Attributed to Sam Khater, Chief Economist, Freddie Mac, “For the fourth consecutive week, the 30-year fixed-rate mortgage hovered above seven percent. The economy remains buoyant, which is encouraging for consumers. Though while inflation has decelerated, firmer economic data have put upward pressure on mortgage rates which, in the face of affordability challenges, are straining potential homebuyers.”   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

With home values remaining strong across the country, Americans are tapping into their home equity to pay for renovations and debts. With low inventory in most housing markets across the country, home prices have held firm after surging during the pandemic. That means homeowners are now collectively sitting on nearly $30 trillion in home equity, according to the St. Louis Federal Reserve. As a result, originations of Home Equity Lines of Credit (known as HELOCs) and home equity loans increased 50% in 2022 compared to two years earlier, according to the Mortgage Bankers Association. “Home renovations and remodeling drove demand for home equity products in 2022, with roughly two-thirds of borrowers citing it as a reason for applying for a home equity loan,” said Marina Walsh, MBA’s vice president of industry analysis. Other reasons that borrowers gave for taking out a HELOC or home equity loan included debt consolidation and emergency cash management. A homeowner’s equity in their home can be a tremendous source of wealth. A HELOC is a revolving source of funds, kind of like a credit card, that can be tapped as needed by the homeowner. A home equity loan comes as a lump sum, often with a fixed interest rate, that can be helpful for a one-time big expense like a renovation. Home equity loans and lines of credit are secured against the value of a homeowner’s home equity, which is the difference between how much your home is worth and how much you owe on your mortgage. A homeowner’s equity will fluctuate over time as they make payments on their mortgage and real estate market dynamics impact the current value of the home. Typically, lenders offer rates for these types of loans that are lower than for most other types of personal loans. “The housing inventory shortage, combined with home-price appreciation and a low-rate first mortgage, make home renovations an attractive alternative for many homeowners who are looking to improve their spaces,” Walsh said. “Additionally, a HELOC or home equity loan is one way to finance big home projects while receiving a tax advantage through the deductibility of mortgage interest.” “Home equity products continue to remain viable options for consumers looking to utilize their tappable equity to pay down higher interest debt, with consumer interest in home equity loans in particular, on the rise this year,” said Joe Mellman, senior vice president and mortgage business leader at TransUnion on findings from the most recent Credit Industry Insights Report. Source: CNN

Fannie Mae and Freddie Mac, the two government-sponsored enterprises (GSEs) that back much of the U.S. mortgage market, have made some temporary condo loan rules now permanent. Fannie Mae and Freddie Mac rolled out new rules cracking down on condo and co-op loans following the 2021 partial collapse of a Surfside, Florida, condo tower. Both government-sponsored enterprises ceased buying loans for condo units in projects where major repairs have been put off, or the condo association has been ordered by local authorities to resolve unsafe conditions. “Concerns about aging infrastructure have continued, including reports of projects with structural challenges that, in some instances, led to evacuations and condemnations,” Fannie Mae executive Jodi Horne stated on the company’s website in July. As part of these tougher rules, Fannie Mae has relegated a reported 1,400 condo associations to a blacklist of projects where it won’t buy loans. There are an estimated 175,000 condo associations in the U.S., according to the Community Associations Institute. Those associations oversee millions of condo units — some, high-value penthouses, many retirement retreats, starter homes and investment properties. After the Surfside collapse illustrated the dangers of poorly maintained condos, Fannie and Freddie began pushing associations to invest in repairs. “They’ve identified lots of major issues on many properties,” says Orest Tomaselli, president of Project Review at CondoTek, a data company that analyzes condos for lenders. “In many ways, the agencies are right on track in identifying these issues.” Tomaselli estimates that some 10 percent of condo projects nationally are “unwarrantable” — meaning the units in those don’t qualify for loans backed by Fannie and Freddie, the most popular type of mortgage. “The increased rigidity of the guidelines have become a barrier,” says Tomaselli. “A lot of properties are falling into the category of unwarrantable — and that’s not a bad thing. There’s a consumer protection issue. I think these guidelines are very good for homeowners and for consumer protection.” Source: Bankrate

Unlike other countries, the “American Dream” ideology held by its citizens disproportionally values owning a home over renting. This idea also takes precedence over raising a family, getting a college degree, or having a career. Owning a home does come with many benefits according to a blog post from the Urban Institute including a sense of belonging to a community, tax breaks, more opportunities to build credit, and a predictable and stable monthly payment that builds wealth. But home seekers have been experiencing anxiety over owning a home recently as the goal line seemingly moves everyday due to insufficient housing supply, rising prices, and tightening credit requirements. Urban Institute is considering just how achievable the American dream is in today’s market. What if, instead, the American dream looked like efforts to expand access to homeownership while enhancing housing sustainability and financial prosperity for renters so they, too, can dream under their roofs? According to Recent Data from Black Knight’s Home Price Index, the average seasonally adjusted national home price increased nearly 80% between April 2015 and April 2023. In this case, homeowners gained a significant amount of wealth while renters, of course, were left out to dry. Owning a home also provided unique financial benefits such as mortgage interest rate deductions during tax season, 30-year fixed-rate mortgages protect borrowers from macroeconomic shocks and problems, and the ability to refinance without a penalty, which can help borrowers in times of low interest rates as many did during the pandemic. The Urban Institute focuses on ways and strategies to institute to break down systemic barriers to homeownership: expand access to credit, improve hybrid homeownership options and increase the supply of affordable housing. Source: MReport