The last two years caught many of us off guard—and not just because of the pandemic. They also ushered in the hottest housing market on record, with home prices rising nationally by nearly 19% in 2021, driven primarily by low mortgage rates and a major supply shortage.1
But while some had hoped 2022 would bring a return to normalcy, the U.S. real estate market continues to boom, despite rising interest rates and decreasing affordability.
So what's driving this persistent demand? And is there an end in sight?
Here are three factors impacting the real estate market right now. Find out how they could affect you if you're a current homeowner or plan to buy or sell a home this year.
MORTGAGE RATES ARE RISING FASTER THAN EXPECTED
Over the past couple of years, homebuyers have faced intense competition for new homes—in part due to historically low mortgage rates that were a result of the Federal Reserve's efforts to keep the economy afloat during the COVID-19 pandemic.
However, in response to a concerning level of inflation, the Fed is now reversing those efforts by raising the federal funds rate. And as a result, mortgage rates are rising, as well. Few experts predicted, though, that mortgage rates would go up as quickly as they have.
In January 2022, the Mortgage Bankers Association projected that rates would reach 4% by the end of this year.2 By mid-April, however, the average 30-year fixed mortgage rate had already hit 5%, up from around 3% just one year prior.3 On a $400,000 mortgage, that 2% difference could translate into an additional $461 per monthly payment.
Since then, mortgage rates have continued on an upward trend. So what impact are these rising rates having on demand? While many buyers had hoped for a cooling effect, experts warn that may not be the case.
Ali Wolf, chief economist at housing market research firm Zanda, told Fortune magazine, "Rising mortgage rates are having a counterintuitive effect on the housing market. Home shoppers are actually sprung into action in an attempt to buy a home before mortgage rates rise any higher."4
Since inventory remains low, the resulting "race" has kept the homebuying market highly competitive–at least for now.
What does it mean for you?
While current 30-year fixed mortgage rates represent an increase over previous months, they remain well below the historical average of 8%.5 As inflation across the economy continues, the Fed is likely to raise rates further this year. Buyers should act fast to secure a good mortgage rate. We'd be happy to refer you to a lender who can help.
For sellers, speed is also of the essence. The pool of potential buyers may shrink as mortgages become more expensive. And if you plan to finance your next home, you'll want to act quickly to secure a favorable rate for yourself. Contact us today to discuss your options.
HOME PRICES KEEP CLIMBING
History shows that higher interest rates don't necessarily translate to lower home prices. In fact, home prices rose 5% between 1980 and 1982, a period of significantly higher mortgage rates and inflation.5
Forecasters expect that home prices will continue to go up throughout 2022, though likely at a slower pace than the 18.8% increase of the last 12 months.4 Bank of America predicts that prices will be up approximately 10% by the end of this year, while Fannie Mae estimates 11.2%.6,7
In addition to limited supply and a race to beat rising mortgage rates, home values are also climbing because of positive economic indicators, like low unemployment.8 Plus, rents are soaring–up 17% from a year ago–which is prompting more first-time homebuyers to enter the market.9 Add to that the continued popularity of remote work, and it's easy to see why property prices continue to surge.
However, it's not all bad news for prospective homebuyers. Economists expect that as mortgage rates rise, the rate of appreciation will continue to taper, though the effect may be gradual.
"Eventually mortgage rates will slow down home prices," according to Ken Johnson, an economist at Florida Atlantic University interviewed by Marketwatch.10 "We should not see rapid upticks in prices as mortgage rates rise." Forecasters agree—Fannie Mae expects price increases to slow to 4.2% in 2023.7
What does it mean for you?
While the pace of appreciation is likely to decrease next year, home prices show no signs of going down. However, current labor shortages are leading to higher salaries and better job opportunities for many workers. You may find that your income growth outpaces home prices, making homeownership more affordable for you in the future.
For homeowners, the outlook's even brighter. You could find yourself sitting on a nice pile of equity. Contact us for a free home value assessment to find out.
INVENTORY REMAINS EXTREMELY LOW
As noted, one of the largest hurdles to homeownership is a lack of inventory. According to a February 2022 report by Realtor.com, there's an expanding gap between household formation and home construction, which has resulted in a nationwide shortage of 5.8 million housing units.11
The origins of this shortage date back to the 2008 housing crisis, during which crashing home values led contractors to stop building new properties—a trend that has not been fully reversed.12
That decline in home construction also resulted in a decrease in the number of home building professionals, a trend that was exacerbated by job losses during the COVID-19 pandemic. Now, many builders are limited by their ability to find qualified labor.
Another major challenge is a staggering increase in the cost of materials. Pandemic-related supply chain shortages have been a significant driver, with home building material costs rising on average 20% on a year-over-year basis. The price of framing lumber alone has tripled since August 2021.13
These trends add tens of thousands of dollars to the cost of a typical home. Factors like a lack of buildable land in many areas, restrictive zoning, and a shortage of developers are also contributing to the issue.14
Most homebuying experts agree that the lack of inventory is the primary factor driving rising housing prices and unprecedented competition for homes. With available housing units near four-decade lows, the end of the current housing boom is not yet in sight.15
What does it mean for you?
Prospective buyers should be prepared to compete for a home, since low inventory can lead to multiple offers. You may also need to expand your search parameters. If you're ready to look, we're ready to help.
For sellers, the picture is rosier. In this strong market, your home may be worth more than you realize. Contact us to find out how much your home could sell for in today's market.
WE'RE HERE TO GUIDE YOU
While national real estate trends can provide a "big picture" outlook, real estate is local. And as local market experts, we can guide you through the ins and outs of our market and the local issues that are likely to drive home values in your particular neighborhood.
If you're considering buying or selling a home, contact one of our Montague Miller & Co real estate professionals to schedule a free consultation. We can help you assess your options and make the most of this unique real estate landscape.
What does the rest of the year hold for the Houseing Market? Here's what experts have to say about what lies ahead.
Home Prices are projected to rise and so are mortgage rates. Experts are also forecasting another strong year for home sales as people move to meet their changing needs.
Connect with a Montague Miller & Co local real estate professional so you can make your best move this year.
Resources: Keeping Current Matters, CoreLogic, Freddie Mac, Fannie Mae, NAR, Calculated Risk, MBA
You can't read an article about residential real estate without the author mentioning the affordability challenges that today's buyers face. There's no doubt homes are less affordable today than they were over the last two years, but that doesn't mean homes are now unaffordable.
There are three measures used to establish home affordability: home prices, mortgage rates, and wages. Let's look closely at each of these components.
The most recent Home Price Insights report by CoreLogic shows home values have increased by 19.1% from last January to this January. That was one reason affordability declined over the past year.
While the current global uncertainty makes it difficult to project mortgage rates, we do know current rates are almost one full percentage point higher than they were last year. According to Freddie Mac, the average monthly rate for last February was 2.81%. This February it was 3.76%. That increase in the mortgage rate also contributes to homes being less affordable than they were last year.
The one big, positive component in the affordability equation is an increase in American wages. In a recent article by RealtyTrac, Peter Miller addresses that point:
"Prices are up, but what about wages? ADP reports that job holder incomes increased 5.9% last year but rose 8.0% for those who switched employers. In effect, some of the higher cost to buy a home has been offset by more cash income."
The National Association of Realtors (NAR) also recently released information that looks at income and affordability. The NAR data provides a comparison of the current median family income versus the qualifying income for a median-priced home in each region of the country. Here's a graph of their findings:
As the graph shows, the median family income (shown in blue on the graph) is greater than the qualifying income needed to buy a median-priced home (shown in green on the graph) in all four regions of the country. While those figures may vary in certain locations within each region, it's important to note that, in most of the country, homes are still affordable.
So, when you think about affordability, remember that the picture includes more than just home prices and mortgage rates. When prices rise and rates rise, it does impact affordability, and experts project both of those things will climb in the months ahead. That's why it's less affordable to buy a home than it was over the past two years when prices and rates were lower than they are today. But wages need to be factored into affordability as well. Because wages have been rising, they're a big reason that, while less affordable, homes are not unaffordable today.
To find out more about affordability in our local area, let's discuss where home prices are locally, what's happening with mortgage rates, and get you in contact with a lender so you can make an informed financial decision. Remember, while less affordable, homes are not unaffordable, which still gives you an opportunity to buy today.
For many homebuyers, the thought of saving for a down payment can feel daunting, especially in today's market. That's why, when asked what they find most difficult in the homebuying process, some buyers say it's one of the hardest steps on the path to homeownership. Data from the National Association of Realtors (NAR) shows:
"For first-time home buyers, 29 percent said saving for a downpayment [sic] was the most difficult step in the process."
If you're finding that your down payment is your biggest hurdle, the good news is there are many down payment assistance programs available that can help you achieve your goals. The key is understanding where to look and learning what options are available. Here's some information that can help.
According to downpaymentresource.com, there are thousands of financial assistance programs available for homebuyers, like affordable mortgage options for first-time buyers. But, of the many programs that are available, down payment assistance options make up the large majority. They say 73% of the assistance available to homebuyers is there to help you with your down payment.
And it's not just first-time homebuyers that are eligible for these programs. Downpaymentresource.com notes:
"You don't have to be a first-time buyer. Over 38% of all programs are for repeat homebuyers who have owned a home in the last 3 years."
That means no matter where you are in your homeownership journey, there could be an option available for you.
There are also multiple down payment assistance resources designed to help those who serve our communities. Teacher Next Door is one of those programs:
"The Teacher Next Door Program was designed to increase home ownership among teachers and other public servants, support community development and increase access to affordable housing free from discrimination."
Teacher Next Door is just one program that seeks to help teachers, first responders, health providers, government employees, active-duty military personnel, and veterans reach their down payment goals.
And, most importantly, even if you don't qualify for these types of specialized programs, there are many federal, state, and local programs available for you to explore. And the best way to do that is to connect with a local real estate professional to learn more about what's available in your area.
If saving for a down payment seems daunting, there are programs available that can help. And if you work to serve our community, there may be even more opportunities available to you. To learn more about your options, let's connect so you can start your homebuying journey today.
Resources: Keeping Current Matters, Teacher Next Door, Simplifying the Market, National Association of Realtors (NAR)
As a seller, you will be most concerned about 'short term price' – where home values are headed over the next six months. As a buyer, you must be concerned not about price but instead about the 'long term cost' of the home.
The Mortgage Bankers Association (MBA), the National Association of Realtors, Fannie Mae and Freddie Mac all projected that mortgage interest rates will increase by about three-quarters of a percentage point over the next twelve months.
According to CoreLogic's most recent Home Price Index Report, home prices will appreciate by 5.2% over the next 12 months.
Here is a simple demonstration of what impact an interest rate increase would have on the mortgage payment of a home selling for approximately $250,000 today if home prices appreciate by the 5.2% predicted by CoreLogic over the next twelve months:
In a recent study conducted by Builder.com, researchers determined that nationwide it would take "nearly eight years" for a first-time buyer to save enough for a down payment on their dream home.
Depending on where you live, median rents, incomes and home prices all vary. By determining the percentage a renter spends on housing in each state and the amount needed for a 10% down payment, they were able to establish how long (in years) it would take for an average resident to save.
According to the study, residents in South Dakota are able to save for a down payment the quickest in just under 3.5 years. Below is a map created using the data for each state:
What if you were able to take advantage of one of the Freddie Mac or Fannie Mae 3% down programs? Suddenly saving for a down payment no longer takes 5 or 10 years, but becomes attainable in under two years in many states as shown in the map below.
Whether you have just started to save for a down payment, or have been for years, you may be closer to your dream home than you think! Meet with a local real estate professional who can help you evaluate your ability to buy today.
There are some people that have not purchased a home because they are uncomfortable taking on the obligation of a mortgage. Everyone should realize that, unless you are living with your parents rent free, you are paying a mortgage – either your mortgage or your landlord's.
As The Joint Center for Housing Studies at Harvard University explains:
"Households must consume housing whether they own or rent. Not even accounting for more favorable tax treatment of owning, homeowners pay debt service to pay down their own principal while households that rent pay down the principal of a landlord plus a rate of return.
That's yet another reason owning often does—as Americans intuit—end up making more financial sense than renting."
Christina Boyle, a Senior Vice President, Head of Single-Family Sales & Relationship Management at Freddie Mac, explains another benefit of securing a mortgage vs. paying rent:
"With a 30-year fixed rate mortgage, you'll have the certainty & stability of knowing what your mortgage payment will be for the next 30 years – unlike rents which will continue to rise over the next three decades."
As an owner, your mortgage payment is a form of 'forced savings' that allows you to have equity in your home that you can tap into later in life. As a renter, you guarantee your landlord is the person with that equity.
The graph below shows the widening gap in net worth between a homeowner and a renter:
Whether you are looking for a primary residence for the first time or are considering a vacation home on the shore, owning might make more sense than renting with home values and interest rates projected to climb.
Mortgage interest rates, as reported by Freddie Mac, have increased over the last several weeks. Along with Freddie Mac, Fannie Mae, the Mortgage Bankers Association and the National Association of Realtors are all calling for mortgage rates to continue to rise over the next four quarters.
This has caused some purchasers to lament the fact they may no longer be able to get a rate less than 4%. However, we must realize that current rates are still at historic lows.
Here is a chart showing the average mortgage interest rate over the last several decades.
Though you may have missed getting the lowest mortgage rate ever offered, you can still get a better interest rate than your older brother or sister did ten years ago; a lower rate than your parents did twenty years ago and a better rate than your grandparents did forty years ago.