Homebuyers in need of financing may have hit a pay wall as mortgage rates rise more than a percentage point in just eight weeks.
The average rate for a 30-year fixed-rate mortgage hit 4.67% on Thursday, March 31, according to Freddie Mac. This is 1.5 percentage points more than a year ago. And rates are more than 2 points higher than Freddie Mac’s all-time low of 2.65% just 15 months ago.
A key indicator of homebuyer interest is buying mortgage applications. According to the Mortgage Bankers Association, applications are down 40% from a year ago.
“We are at a turning point in the market. Supply activity is slowing,” said Patrick Veling, president and CEO of Real Data Strategies. “Homebuyers, especially in the $1.1 to $1.4 million price range, are saying we’re mad and we’re not going to take it anymore.”
Nationally, home prices rose 19.2% year over year in January, according to the S&P/CoreLogic Case-Shiller Index.
The annual inflation rate was 7.9% in February, according to the Labor Department. Consider how closely real home affordability correlates with inflation.
Let’s say someone bet 20% on a $500,000 first home a year ago. The principal and interest payment on $400,000 at the Freddie Mac rate of 3.18% a year ago would have been $1,725. Add $125 per month for insurance and 1.25% for property taxes, and we arrive at a total payment of $2,371.
Assuming a 19.2% increase in house prices, we are looking at a sale price of $596,000. Assuming a 20% decline, we have a loan amount of $476,800 at Freddie Mac’s current rate of 4.67%. Principal and interest payments are $2,464. Add $135 (assuming a 7.9% inflation rate) for insurance and $621 for property taxes, and we get a payment of $3,220, or $849 more per month.
This is an increase over one year of nearly 36%. How does that square with an inflation rate of 7.9%?
Real average hourly wages fell 1.3% from January 2021 to last January, according to the US Bureau of Labor Statistics. Clearly, the pandemic is playing on the labor market. Home affordability becomes even more limited.
“We have excess demand over supply, which is driving up prices,” he said. Ted Tozer, former chairman of Ginnie Mae under President Obama. “The goal is the balance of supply and demand.”
While Tozer thinks the economy is very strong, he points out that Fed Chairman Paul Volker has raised short-term rates to 20%, with mortgage rates hitting 15%. Volker deliberately pushed the United States into a recession to reduce demand.
Another sign of a losing market? Inventory becomes a mixed bag, at least locally.
Listings of homes for sale are down 25% from a year ago in Los Angeles County and 34% in Orange County, according to Steven Thomas of Reports on Housing. At the same time, supply is up in the Inland Empire, increasing 31% in San Bernardino County and 4% in Riverside County.
What does all this mean for house prices?
Michael Pento, president and founder of Pento Portfolio Strategies, estimates that the Department of Labor will report next month that the March inflation rate is up 9%. He also sees a recession coming, citing the recent inversion of the 10-year and 2-year yield curves and the Fed’s aggressive action to raise short-term rates.
As a result, he said, house prices could fall by at least 20% next year.
“The Fed needs to tighten interest rates to get inflation under control,” Pento said. “We are on a fiscal and monetary cliff. The Fed needs to move from quantitative easing to quantitative tightening. (There was) $800 billion on the Fed’s balance sheet in 2008, and (there is) $9 trillion today.
Not everyone expects home prices to fall.
Mark Vitner, senior economist at Wells Fargo, thinks real estate will appreciate 10% in 2022 and 7% in 2023. But he fears the Fed is trying to do too much too fast, pushing the US economy into a tailspin. a recession.
“The fight to contain inflation will be a multi-year project,” Vitner said. “I think the 30-year fixed will come down again this year.”
Most experts I interviewed expected mortgage rates to land around 4.5% for a fixed 30-year term by the end of 2022. We’ve already topped that rate at 4.67 %, and we just finished the first quarter.
Could we soon see 5% fixed rates? We are not far.
If the exotic mortgage market is any indication, we’re going to hit 5% and then a bit higher in the conventional mortgage market. Non-standard, so-called non-qualified, mortgages are already north of 6% for a 30-year fixed. Yeah.
Mortgage lenders are pretty shaken up these days. In addition to a shortage of would-be homebuyers, refinance volume is down 60% from a year ago, according to the Mortgage Bankers Association.
There will always be motivated buyers in one form or another.
“Assuming rates stay where they are, (domestic) supply constraints will keep prices from falling,” Veling said. He sees the appreciation of the house go from 19% to 8% or 9%.
According to Veling, buyers are looking for lifestyle over the next 18 to 36 months, not appreciation.
“They have families and want to raise families in a home.”
Freddie Mac rates the news: The 30-year fixed rate averaged 4.67%, 25 basis points higher than last week. The 15-year fixed rate averaged 3.83%, 20 basis points higher than last week.
The Mortgage Bankers Association reported a 6.8% drop in mortgage application volume from the previous week.
At the end of the line : Assuming a borrower gets the average 30-year fixed rate on a conforming loan of $647,200, last year’s payment was $553 less than this week’s payment of $3,345.
What I see: Locally, well-qualified borrowers can obtain the following fixed rate mortgages without points: A 30-year FHA at 4.125%, a 15-year conventional at 3.875%, a 30-year conventional at 4.375%, an -balance (647 $201 to $970,800) at 4.675%, a 30-year conventional high balance at 4.875%, and a 30-year fixed buy jumbo at 4.25%.
Eye-Catching Loan of the Week: A 30-year purchase, an adjustable jumbo mortgage of up to $5 million with a cost of half a point, locked in for the first five years at a rate of 3.125%.
Jeff Lazerson is a mortgage broker. He can be reached at 949-334-2424 or [email protected] His website is www.mortgagegrader.com.