Interest Rates Climb Again

Rising mortgage interest rates have hit the housing market like a sucker punch—and they’re poised to deliver another bruising blow.

Mortgage rates could climb even higher after the U.S. Federal Reserve announced on Wednesday that it was increasing its short-term interest rates by three-quarters of a percentage point. The Fed has been steadily hiking rates this year in its quest to bring inflation down, even at the risk of plunging the economy into a recession. And while mortgage rates are separate from the Fed’s rates, they generally follow a similar trajectory.

“People want to know when it’s going to end and how high rates are going to be when it does,” says Realtor.com® Chief Economist Danielle Hale. “Housing is an interest rate-sensitive sector. When interest rates are high, it’s much more challenging for buyers. And it looks like interest rates are going to stay high for the foreseeable future.”

Record-low mortgage rates during the COVID-19 pandemic allowed home prices to reach new heights. The lower the rate, the lower the monthly housing payment buyers were making to their lenders. But the reverse is also true. Every time rates rise, even by just a fraction of a percentage point, it becomes more expensive for homebuyers to purchase the same property.

Mortgage rates have made it more expensive to purchase a home with a loan

At the start of the year, mortgage rates were about 3.22% for 30-year fixed-rate loans, according to Freddie Mac. However, they averaged 7.08% in the week ending Oct. 27—and now they will likely climb even higher.

Monthly mortgage payments swelled about 75%* in the past year. That’s resulted in many would-be buyers no longer being able to qualify for a mortgage. Those who still can are often financially stretched to their max, looking for much cheaper homes than what they could have afforded just a few months ago.

“The run-up in mortgage rates comes on the heels of two years of strong home price appreciation,” says Greg McBride, chief financial analyst at Bankrate.com. “So it’s like a double whammy from an affordability perspective.”

How the housing market has responded to high mortgage rates

However, the housing market is adjusting to the new reality. The number of home sales has basically dropped off a cliff. In September, sales of existing homes fell 23.8% year over year, according to the National Association of Realtors®. (Existing homes do not include new construction.) Sales of newly built homes dropped 17.6% over the same period.

Most worrisome, though, is the number of applications for mortgages to purchase homes decreased 40.7% year over year in the week ending Oct. 28, according to the Mortgage Bankers Association.

Sellers, realizing they’ve missed the peak of the market, have been reluctant to list their properties. Homes aren’t selling as quickly. To close the deal, many sellers have been forced to reduce their prices, contribute to closing costs, or make other concessions.

Prices have also begun to come down in many markets, down from their peaks over the spring and summer. Buyers simply can’t afford the big price tags plus the higher rates.

Where mortgage rates will go next

Hale believes it is possible that rates will hit 7.5% by the end of the year, but she doesn’t foresee them going as high as 8%. She expects the Fed will continue raising its rates, or keep them high if it pauses its increases, through next year. But she concedes that “it is really difficult to forecast mortgage rates, especially when the economic landscape is changing.”

There is a little room for mortgage rates to dip—or at least steady.

“They’ve already increased more than is typical, given where other financial rates are,” says Hale. “We might not see mortgage rates climbing with the same intensity that we have recently. But as long as the Fed keeps raising rates, there’s going to be the pressure for mortgage rates to also move higher.”

Lenders hemorrhaging business may also want to keep rates reasonable to keep customers coming through their doors, she says.

In some ways, the higher rates have been a boon to the buyers who can still afford a home. When rates were lower, those looking to purchase homes crammed into the market, making it extremely competitive.

“I’m not sure it was a great environment for buyers when there were bidding wars and prospective buyers were losing out to cash buyers or having to bid way above asking price to have a chance,” says McBride. “The cooling of the housing market has given buyers who remain in the market more negotiating power and the opportunity to do their homework before making the biggest purchase of their lives.”

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Experts in Residential Real Estate in Orlando

If you are buying or selling real estate it’s quiet often the single most important financial decision you make. For the last 30 years we have helped clients buying and selling property in Orlando and the surrounding areas. Put simply, this means the knowledge and expertise accumulated over this time ensures our clients get the best representation possible.

Our experienced agents will help and guide you through the entire process providing valuable support every step of the way.

Lower Mortgage Rates for Homebuyers—or a Temporary Reprieve?

The drumroll of bad tidings in the housing market was interrupted last week by a glimmer of good news. Finally.

Soaring mortgage interest rates, which have caused deep financial pain for many homebuyers and led to a freeze in the housing market, dropped by about half of a percentage point last week. They fell from above 7% to 6.6% for 30-year fixed-rate loans in the week ending Nov. 17, according to Freddie Mac.

Buyers shouldn’t celebrate just yet, though.

Many real estate experts believe the lower rates are a temporary reprieve, not a sign that rates will go back to the 2% and 3% ranges seen last year. In fact, many anticipate rates will return to around 7% this year.

But the good times aren’t likely to last for long, he says. “I still expect rates to potentially move back toward 7% in the next few weeks.”

The respite in rates will save buyers about $100 a month on their mortgage payments—and nearly $48,000 in interest over the life of a 30-year fixed-rate loan. (This assumes they put down 20% on a median-priced home of $425,000, not including taxes and insurance.) While that’s encouraging for buyers who have grappled with how to make the math of homeownership pencil out, prices are still high and rates haven’t cooled enough to make much of a dent.

But most experts believe the big increases in mortgage rates, which have more than doubled in the past year, are in the rearview. While they expect rates will fluctuate a bit, they predict mortgage rates will stay in the 7% range, but won’t go as far as 8%.

Why did mortgage rates fall?

Mortgage rates rise and fall for a variety of complex—and often competing—financial reasons.

As the Federal Reserve has raised its interest rates to combat inflation, mortgage rates have similarly shot up. Since inflation is still high, rates are expected to remain elevated as well.

However, there are signs that inflation could be tapering off. The Fed scored a win earlier this month when the October inflation report was released. Inflation began to cool in earnest, going from a high of 9.1% year over year in June to 7.7% in October.

That cheered investors, who also play a big part in determining the direction of mortgage rates through the mortgage bond market. Lenders typically bundle up mortgages they make and then sell them to investors to free up more cash to make new loans.

When inflation is high, investors seek higher returns on their purchases of mortgage-backed securities, aka mortgage bonds, in the form of higher mortgage rates. Since inflation appears to be responding to the Fed’s actions, they’re hopeful that the Fed will slow its rate increases. So there isn’t as much pressure on rates to stay high.

The problem with higher mortgage rates

Higher mortgage rates have essentially frozen the housing market.

Coupled with still-high home prices, many who had planned to purchase their first homes can no longer qualify for loans. Others have been forced to cut their homebuying budgets drastically. Despite home prices beginning to fall, they would need to plummet dramatically to outweigh the higher rates. So even though there are many who would like to become homeowners, they can no longer afford to do so. So home sales have dropped.

The number of homes for sale is also still critically low. Builders worried they won’t find buyers for their residences are slowing the pace of construction. And sellers, most of whom are also buyers, are reluctant to give up their low mortgage rates to buy a home with a new loan with a higher rate.

And as high as mortgage rates are today, they’re still substantially lower than they have been. In 1981, rates peaked when they briefly topped 18.5% for a 30-year fixed-rate loan.

Source

Experts in Residential Real Estate in Orlando

If you are buying or selling real estate it’s quiet often the single most important financial decision you make. For the last 30 years we have helped clients buying and selling property in Orlando and the surrounding areas. Put simply, this means the knowledge and expertise accumulated over this time ensures our clients get the best representation possible.

Our experienced agents will help and guide you through the entire process providing valuable support every step of the way.

What To Expect in the Housing Market for the Rest of 2022

What a difference just a few months can make. As the year comes to a close, the red-hot housing market has been brought to its knees by soaring mortgage interest rates.

It now appears to be in a standoff as just about everyone suddenly feels stuck. Home prices are beginning to fall from their peaks in some of the nation’s hottest markets—but not enough to make up for the higher mortgage rates. So more and more buyers simply can’t afford to buy. Sellers, who are typically also buyers, don’t want to give up their low mortgage rates to purchase new properties. Renters can’t afford to move. And many new homeowners fear they bought at the peak of a rapidly deteriorating market.

“No one wants to catch a falling knife,” says economist Yelena Maleyev of KPMG US. “No one wants to buy in a market when prices are falling. You want to wait it out.”

So what’s next as 2022 comes to an end? Will mortgage rates continue to rise? Could prices come down even more? And will buyers return to the market?

“There is definitely a belief that home prices will go down. So consumers are saying, ‘Why would I buy now if prices are lower in two months’ time or three months’ time?’” says Ali Wolf, chief economist of Zonda, a real estate consultancy.

“That mindset is freezing the housing market.”

In the past year, mortgage rates have risen from just under 3% to more than 7% for 30-year fixed-rate loans, according to Freddie Mac. That translates into mortgage payments rising by hundreds of dollars more every month. Median monthly mortgage payments are now about 81% higher than they were a year ago, according to a Realtor.com® analysis.

Few buyers, especially first-timers, can afford that sort of increase. Many can no longer qualify for mortgages due to the higher rates, and others are being forced to slash their budgets. Homes are sitting on the market longer, sellers are slashing prices, and sales are stalling. So the pressure is on home prices to come down. And they’re beginning to oblige.

“The housing market is getting crushed,” says Mark Zandi, chief economist at Moody’s Analytics. “Potential first-time homebuyers can’t afford to buy, potential trade-up buyers can’t afford to move. Investors have gone to the sidelines because they know prices are going to fall further.”

How low will home prices go?

Many prospective buyers are eyeing home prices like a game of limbo. How low will they go?

Zandi, from Moody’s Analytics, expects prices will fall nationally by about 10% from peak to trough, bottoming out in the summer of next year. They’ll go down even more in the pandemic hot spots—such as Phoenix; Boise, ID; and Austin, TX—that experienced the biggest run-ups. Prices in these places could drop as much as 20%. Florida, where the demand from buyers is still strong, could hold up a bit better, he says.

“The markets that got most juiced up during the [COVID-19] pandemic are the markets that are going to experience the biggest declines going forward,” says Zandi.

Wolf, of Zonda, expects prices could fall by 15% nationally over the next year. She’s seeing about 40% of builders cutting prices.

However, it’s important to put any price declines into perspective. Nationally, home list prices rose 40.6% in just over two years’ time—from March 2020, when the pandemic lockdowns began, to the peak of the market this past June, according to Realtor.com data. So a 10%, 15%, or even 20% drop over a two-year span isn’t as significant as it might seem at first.

“A really important thing to remember is housing is cyclical,” says Wolf. “We came from a massive run-up in prices, sales, demand in the housing market, and now it’s contracting. This is not new.”

And not everyone is anticipating a dramatic fall in prices.

Lisa Sturtevant, chief economist of the Bright MLS, which covers the mid-Atlantic region, expects prices will come down a bit from their peaks over the summer. But for much of the country, price growth will slow. That means prices won’t rise at such a large clip as they did during the pandemic.

“I don’t anticipate a big price crash,” says Sturtevant.

Rental prices are also poised to slow

The wild rent increases of the past year are also slowing down.

Most renters are struggling to afford the higher price tags, especially as inflation, gas, and other costs have soared. Rents in many places are so high that many young adults can’t afford to move out of their parents’ homes. And now many companies are issuing pink slips, making it even harder for renters to afford these high prices.

Zandi expects that rents will stabilize and could even come down a little in the parts of the country where they went up the most.

“They’ll be weaker in the near term,” he says.

Mortgage rates are poised to rise—but are coming down instead

Mortgage rates are expected to remain high—and could even rise through the end of the year.

This is due to the U.S. Federal Reserve, which has been hammering the housing market by raising its interest rates to combat inflation. When the Fed raises its rates, mortgage rates generally follow. And the Fed is expected to continue jacking up its rates.

However, mortgage rates fell last week after the government showed inflation was still strong but was slowing. That means the Fed will continue raising its rates, but perhaps not as much as previously anticipated. That unexpected optimism explains why mortgage rates were down from 7.22% to 6.62% on Thursday for 30-year fixed-rate loans, according to Mortgage News Daily.

While mortgage rates are still expected to remain high through the rest of the year, many are watching closely to see what they do next.

“The doubling of rates is over,” says Maleyev of KPMG. The housing market will “pick back up when interest rates start to go down again.”

More homes are for sale, but not many new ones are coming on the market

Buyers finally have more options to choose from—just not many new ones they haven’t already seen.

Some sellers, who were planning to list their homes in the next few years, are still going to attempt to unload their properties while prices are still high. Others will need to sell for life reasons, such as needing more space as their families grow or wanting less space as their children leave the nest. There are also those who will move for work or to be closer to family and friends.

“There are always reasons why people have to move, and those moves will still happen,” says Sturtevant. But “if you don’t have to buy a home, you might decide this is not the right time to make that move.”

Most sellers are also buyers. Those who don’t need to move will likely stay put—especially if they have a mortgage. Most homeowners now have loans with rates in the 2% and 3% range. If they purchase a new home, they will need to get a new loan with a rate that’s likely to be at least twice as large. And higher rates can add hundreds, if not more than a thousand, to a monthly mortgage payment.

Plus, many of those who do sell right now are having to cut prices, contribute to buyer closing costs, or make other concessions.

Builders currently have a lot of homes in the pipeline, but they’re beginning to pause construction in the face of fewer buyers. Many are still scarred from the run-up to the Great Recession, where they built more homes than there were buyers for—and then lost their shirts when the downturn happened. Despite the housing shortage, they don’t want a repeat of the housing bust when many companies went under.

That’s going to decrease turnover in the housing market and affect the number of homes sold. Sales have dropped in recent months as a result of all of the turbulence in the housing market. Even investors are now holding off, favoring a wait-and-see approach.

“We’re living through a really unique time in the housing market because we have both a buyer’s strike and a seller’s strike happening at the same time,” says Zonda’s Wolf. “When you have both of those things happening, home sales will inevitably come down.

A recession would weaken the housing market even further

If the nation tips into a full-fledged recession with widespread unemployment, the housing market will fare even worse.

“Recession risks are very high,” says Zandi. He thinks the nation could still avoid one, but just barely. “It’s going to be very close.”

Nationally, home prices could drop 20% during a recession and more in the most “juiced up” markets, says Zandi.

However, real estate experts don’t anticipate a repeat of the Great Recession when home prices crashed, bad mortgages went bust, and foreclosures swept the nation. Since the last bubble popped, most of the subprime mortgages that got homeowners into trouble have been abolished. Lenders have become stricter, and now only the most qualified borrowers are getting approved for mortgages, lessening the risk of another foreclosure crisis.

And unlike during the last crisis, there are more buyers than there are homes for sale.

“Prices will come down, but they’re not going to collapse because there is this shortage of homes,” says Zandi. “That will help ensure the market doesn’t collapse.”

The bright spot of a recession is that, during a downturn, the Fed is more likely to lower rates to stimulate the economy. That would likely lead to falling mortgage rates. Combined with lower home prices, first-time and other buyers could jump back into the housing market.

“This is still a pretty strong economy,” says Padhraic Garvey. He is the regional head of research, Americas, at the multination financial services and banking company ING. “There is a recession risk, but we don’t have the ingredients there for the housing market to crash. Prices won’t collapse off a cliff.”

Source

Experts in Residential Real Estate in Orlando

If you are buying or selling real estate it’s quiet often the single most important financial decision you make. For the last 30 years we have helped clients buying and selling property in Orlando and the surrounding areas. Put simply, this means the knowledge and expertise accumulated over this time ensures our clients get the best representation possible.

Our experienced agents will help and guide you through the entire process providing valuable support every step of the way.