626: Interest Rate Increase Results in 12% Mortgage Decline

SHOW NOTES FOR EPISODE 626: INTEREST RATE INCREASE RESULTS IN 12% MORTGAGE DECLINE

The Federal Reserve’s interest rate hikes are starting to make a dent in our hot housing market.  As rising rates have pushed home prices even higher, mortgage applications dropped 12% last week compared to the week prior and were 15% lower than the same week one year ago.  In this episode , Bill will share what this means for the housing market and how it will impact investors.

Interest Rate Increase Results in 12% Mortgage Decline

The Federal Reserve’s interest rate hikes are starting to make a dent in the U.S.’s hot housing market.

What’s happening? 

As rising rates have pushed home prices even higher, mortgage applications dropped 12% last week compared to the week prior and were 15% lower than the same week one year ago, according to the latest Mortgage Bankers Association’s weekly mortgage applications survey released Wednesday.

It’s the first time mortgage applications have decreased in three weeks. Even though mortgage rates dipped slightly last week, they remain over two percentage points higher than a year ago and are nearing the highest levels since 2009.

According to Joel Kan, Mortgage Bankers Association’s associate vice president of economic and industry forecasting, “Purchase applications fell 12% last week, as prospective homebuyers have been put off by higher rates and worsening affordability conditions.”

Economic uncertainty and recent stock market volatility “may be causing some households to delay their home search.”

Refinancing is down, too

The high rates are also impacting homeowners’ refinance prospects. The Mortgage Bankers Association’s refinance index dropped 10% from the previous week and was 76% lower than the same week last year.

Kan says, “For borrowers looking to refinance, the current level of rates continues to be a significant disincentive.”

Kan further said that the latest Mortgage Bankers Associations weekly survey results were consistent with the association’s May forecast released earlier this week.

That forecast predicts “fewer home sales and mortgage originations in 2022 compared to a year ago.”

The Big Picture

The Fed hiked interest rates in hopes of combatting inflation, and now they are starting to have a cooling effect on the U.S.’s overheated housing market.

But at the same time, the rate hikes have priced out even more homebuyers and prices continue to escalate — especially in high-demand, high-growth areas like the West.

In Utah, local experts have said rising mortgage rates will likely only slow — not stop — housing price increases, while pricing out even more potential homebuyers.

Last week, the average rate for a 30-year fixed mortgage was 5.4%, which is a decrease of 17 basis points over the last week, according to Bankrate.com.

Home Sales Tumble as Mortgage Rates Surge

As a result, of course, home sales are declining.

Sales of previously occupied U.S. homes slowed for the third consecutive month in April as mortgage rates surged, driving up borrowing costs for would-be buyers as home prices soared to new highs.

Existing home sales fell 2.4% last month from March to a seasonally adjusted annual rate of 5.61 million, the National Association of Realtors said Thursday.

That was slightly higher than what economists were expecting, according to FactSet. Sales fell 5.9% from April last year. After climbing to a 6.49 million annual rate in January, sales have fallen to the slowest pace since June 2020, near the start of the pandemic, when they were running at an annualized rate of 4.77 million homes.

The median home price in April jumped 14.8% from a year ago at this time to $391,200. That’s an all-time high according to data going back to 1999, NAR said.

“Without a doubt, rising mortgage rates, rising prices are hurting affordability, but we should not discount that we’re still lacking inventory,” said Lawrence Yun, NAR’s chief economist.

Fierce competition for limited properties on the market and ultra-low mortgage rates superheated the housing market the last couple of years, but now it’s cooling as homebuyers face sharply higher home financing costs than a year ago following a rapid rise in mortgage rates.

In April, the weekly average rate on a 30-year fixed-rate home loan climbed above 5% for the first time in more than a decade, crimping would-be homeowners’ purchasing power at the outset of the spring home buying season, traditionally the busiest period for home sales.

Mortgage buyer Freddie Mac reported Thursday that the 30-year rate slipped to 5.25% this week from 5.3% last week. A year ago, the average rate stood at 3%.

Mortgage rates are climbing following a sharp move up in 10-year Treasury yields, reflecting expectations of higher interest rates overall as the Federal Reserve hikes short-term rates in order to combat the worst inflation in 40 years.

With inflation at a four-decade high, rising mortgage rates, elevated home prices and tight supply of homes for sale, homeownership has become less attainable, especially for first-time buyers.

Higher rates can limit the pool of buyers and cool the rate of home price growth — good news for buyers. But higher rates can also limit affordability.

For now, the housing market continues to favor sellers as buyers vie for a still tight inventory of homes for sale, which has kept pushing up home prices. Even as sales slowed last month, it was common for homes on the market to receive multiple offers.

Inventory levels have to go higher before multiple offers dissipate from the market, Yun said. Until then, prices are likely to move higher.

“We anticipate, again, a continuing decline in home sales, but not necessarily home prices,” he said.

On average, homes sold in just 17 days of hitting the market last month, unchanged from March or April last year. In a market that’s more evenly balanced between buyers and sellers, homes typically remain on the market 45 days.

As is typical in the spring, the number of homes on the market increased in April from the previous month. Some 1.03 million properties were available for sale by the end of April, up 10.8% from March, but down 10.4% from April last year.

At the current sales pace, the level of “for-sale” properties amounts to a 2.2-month supply, the NAR said. That’s up from 1.9 months in March, and down from 2.3 months a year ago.

Real estate investors and other buyers able to buy a home with just cash, sidestepping the need to rely on financing, accounted for 26% of all sales last month, down from 28% in March, NAR said.

Homes purchased by investors made up 17% of sales in April, down from 18% the previous month, while first-time buyers accounted for 28% of transactions, down from 30% in March and 31% a year ago.

What Does All This Mean for Investors?

You have interest rates going up, loan originations going down and home sales going down. Inflation is at a 40 year high. Yet, home prices are at record highs.

Rents in the US climbed to a new record high again in April, and they are expected to keep rising.

A home, available for sale, is shown on August 12, 2021 in Houston, Texas.

The national median rent was $1,827 a month in April, up 16.7% from a year ago, according to a report from Realtor.com. Rent has been steadily increasing since early last year. If recent trends continue, the report projects the typical rent could be more than $2,000 a month by August.

The continued surge in rental prices is driven by a mismatch between rental supply and rising demand, largely from would-be homebuyers, said Danielle Hale, Realtor.com’s chief economist. Beaten down by the high cost of buying a home, some prospective homeowners are opting to keep renting instead.

So where are the great opportunities?

So, if you are a real estate investor that owns rental properties, you are in a great position. Your cash flow should be going up as demand increases.

If you are shopping for properties, it might take you a bit longer to find the great deals.  However, foreclosures are increasing as home sales decline so there may be more deals on the horizon.

References:

• https://www.deseret.com/u-s-world/2022/5/18/23124651/housing-market-prices-mortgage-demand-interest-rates-is-there-a-bubble-crash-coming-utah-west

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