There appeared to be a renewed sense of urgency in the home market in February as prices increased nationally by 19.8% year over year, according to the S&P CoreLogic Case-Shiller national home price index released this week.
Jeff Taylor, managing director, Mphasis Digital Risk, tells GlobeSt.com that there continues to be a rush to the finish line as home buyers anticipate upcoming rate hikes from the Federal Reserve and push to lock in contracts and rates before the increases begin.
“We believe these dynamics have caused a bit of a frenzy, as prospective buyers were bidding way over asking price to lock in at lower rates and secure a home before the market becomes unaffordable,” Taylor said.
“It’s typically easier to amortize $40,000 over asking price at 2.85% than at 5%—an important consideration coupled with a record low number of existing home inventory.”
Market is Cooling, Not Reversing
On the other hand, Randy Berg, real estate agent Russ Lyon Sotheby’s International Realty, tells GlobeSt.com that he sees the market cooling currently, and the same trend will continue in the coming months, “but I don’t see a backward motion on the horizon.”
For the areas in the Sun Belt regions, the inventory, albeit on the rise, is still considerably low. The Phoenix metro area currently is experiencing an average ratio of four buyers to every active listing, Berg said.
“Until more of a balance between the number of buyers and sellers come into play, we will continue to see appreciation,” Berg said. “With rising interest rates, inflation, and current real estate appreciation, some buyers are stepping back and waiting to see what happens, while others are forging forward to place a foothold in the current market.
“Those who are waiting, I believe, should rethink that plan; if the prediction that interest rates are to exceed 7% and appreciation is going to continue by at least a predictable double-digit rate for 2022, now is the time for those that are budgeting.”
Berg said the current cooling trend will continue for the next year plus, “and then we will start to see a balance come back to our real estate market, placing buyers in a better place to negotiate. And after that, leveling to a more nominal pace in appreciation and interest rates.”
Affordability Challenges Persist for Some
As values continue to climb along with rates, affordability for lower-income buyers will become a bigger and bigger problem, Seth Bellas, Branch Manager at Churchill Mortgage, tells GlobeSt.com.
“One theory is that some buyers are pushing the limits of what they can be approved for, which, coupled with a recession, could increase the number of foreclosures and mortgage defaults,” Bellas said.
“The housing market will likely cool down as the number of buyers dwindles, but if we are headed toward a recession and rates come back down, it will be interesting to see how buyers respond to a lower rate environment and if the slowdown in appreciation will continue or if we will pick up where we left off when rates shift lower.”
According to Freddie Mac’s Primary Mortgage Market Survey, the average 30-year interest rate today is 5.11% with .8% in discount points. In April of 2021, the average 30-year fixed rate was 2.97% with .7% in discount points.
Assuming a 10% down payment, the average median mortgage payment is up over $600/month or 31% YOY.
Gross Monthly Incomes Outpacing Home Appreciation
The easiest way to measure affordability is a households monthly housing payment as a percentage of the households’ gross monthly income, Rick Mount, Managing Partner of California/Nevada Business at Churchill Mortgage, tells GlobeSt.com. “Although housing prices have risen sharply over the past year and continuously since the housing crisis of 2008, gross monthly household incomes over the same time frame have also risen and outpaced housing appreciation allowing for the prices to continue to rise.”
With the recent sharp rise in interest rates, Mount said, “we’re just now seeing the impact as it relates to affordability and housing prices.”
Because of this, there’s a slowdown from the peak activity that will cause the market to slow down to a more sustainable rate of appreciation in the 4% to 6% annual range, Mount said.
“We have to keep in mind that there is still an undersupply of homes for sale and even with a slowing of activity, the impact will be a more normalized market.”
Florida’s Popularity Continues
Florida is one state that is still seeing a good bit of activity—likely because many people want to live there, according to Taylor’s recent survey of homeowners. Weather, family, amenities and taxes, in that order, are the chief reasons people want to live there, he said.
Additionally, the Florida market has experienced a 15% increase in cash buys compared with a year ago, which may indicate more investors are buying in Florida, he said.
“While there are headwinds for the spring buying season such as rising home values, the jump in interest rates and fewer home listings compared to previous years, demand is still fairly strong for homes that do become available,” Berg said.
“Should the continued pressure of low inventory and rising costs persist, there could be a lower volume of home sales in the months ahead, at least as compared with predictions at the start of the year. However, because the labor market continues to be a bright spot with a national unemployment rate of 3.6%, consumers want to use the opportunity to purchase a home.
“We really don’t expect an end to inventory problems for another two years. However, we do see a slowdown of home valuation increases by the end of the year.”