A host of factors continue to dampen new home sales.
In line with a decrease in single-family starts, sales of new US homes plummeted to a four-month low in March.
Estimates by the Census Bureau released Tuesday showed that sales of new single-family houses fell to a seasonally adjusted annual rate of 763,000 units. This is 8.6% below the revised February rate of 835,000 and is 12.6% below last year’s estimate of 873,000.
“A combination of factors has contributed to this decline, including rising interest rates and rising prices which have both hindered purchasing power for buyers, and a decline in single-family starts, which has left inventory levels low,” said Kelly Mangold, partner at RCLCO Real Estate Consulting.
While the March reading represents the biggest monthly decline in almost a year, Fannie Mae deputy chief economist Mark Palim said the series tends to be volatile and follows large upward revisions to the January and February readings.
“Taken as a whole, the first quarter saw 814,000 new homes sold on an annualized basis, the highest since Q1 2021 and slightly above our expectations,” he said.
“Demographics remain a strong driver of housing demand, and as the market adjusts to deliver product at price points and formats that align with this demand, sales are likely to be bolstered,” Mangold added.
The median sales price of new houses sold in March was $436,700, while the average sales price was $523,900. The seasonally-adjusted estimate of new houses for sale was 407,000, representing a supply of 6.4 months at the current sales rate.
Palim expects higher mortgage rates to weigh on sales eventually. However, demand will remain strong and continue to outpace the speed at which homebuilders can complete construction, he said.
“Though the number of new homes available for sale increased by 3.8% in March to 407,000 homes, over half of this increase was driven by homes for sale that were not yet started, which now sits at a record level,” he said. “Sales continuing to outpace construction is also evident in that 33% of sales in March were homes not yet under construction, the largest share since May 2021. The current strength of demand hitting up against large construction order backlogs should dampen the effect in the near term of higher mortgage rates, as there appears to be significant unmet home purchase demand.”
“In particular, due to the shortage of construction labor, buyers may be more hesitant to purchase a fixer-upper understanding that the cost and timeline of renovations may be extended, making a turn-key new construction home more appealing,” Mangold said.
Home equity of older homeowners marches onwards and upwards.
Senior homeowners were close to making $11 trillion in housing wealth by the end of the fourth quarter of 2021, according to the National Reverse Mortgage Lenders Association.
Over the past quarter, homeowners 62 and older achieved a 4% rise in their collective housing wealth. Together, senior homeowners are $405 billion better off than they were in Q3 2021. Senior home equity is now worth a total of $10.6 trillion.
The NRMLA/ RiskSpan Reverse Mortgage Market Index hit another all-time high in the fourth quarter, up to a reading of 370.56. An estimated 3.7%, or $452 billion, increase in home values spurred the increase in older homeowners’ wealth. However, it was offset by a 2.3%, or $47 billion, jump in senior-held mortgage debt.
“In just a few days, we’ll be celebrating Older Americans Month. The theme will be Age My Way. To help ameliorate the risks and concerns surrounding the ability of homeowners to age their way, it is critical that housing wealth is carefully and responsibly considered when developing a comprehensive retirement plan,” said Steve Irwin, president of NRMLA. “For many, housing wealth is indeed their greatest asset, and tapping that equity, under the right circumstances, will enable a secure path to aging security.”
MBA reveals the impact of rising rates to applications.
Following a sharp uptick in rates, mortgage applications fell 8.3% for the week ending April 22, data from the Mortgage Bankers Association’s weekly survey revealed.
MBA’s Market Composite Index, a measure of mortgage loan application volume, was down 8.3% on a seasonally adjusted basis from the previous week. Unadjusted, it was down 7% week over week. In contrast, the average 30-year mortgage rate hit a record high of 5.11%
“With mortgage rates increasing last week to the highest level since 2009, applications continued to decline. Overall application activity fell to the lowest level since 2018, with both purchase and refinance applications posting declines,” said Joel Kan, AVP of economic and industry forecasting at MBA.
The refi index posted a 9% week-over-week decrease, and the purchase index saw an 8% slump from a week ago. As a result, the refinance share of mortgage activity dwindled from 35.7% to 35% of total applications.
“Refinance applications were 70% below the same week a year ago, when the 30-year fixed rate was in the 3% range,” Kan said. “The drop in purchase applications was evident across all loan types. Prospective home buyers have pulled back this spring as they continue to face limited options of homes for sale along with higher costs from increasing mortgage rates and prices. The recent decrease in purchase applications is an indication of potential weakness in home sales in the coming months.”
Meanwhile, the adjustable-rate mortgage share of activity grew to 9.3% of total applications. FHA loans accounted for 10.6% of total applications, up from 9.9% the week prior, and the share of VA loans increased one basis point to 10.2%. The USDA share of total applications stayed unchanged at 0.5%.
“In a period of high home-price growth and rapidly increasing mortgage rates, borrowers continued to mitigate higher monthly payments by applying for ARM loans,” Kan said. “The ARM share of applications last week was over 9% by loan count and 17% based on dollar volume. At 9%, the ARM share was double what it was three months ago, which also coincides with the 1.5 percentage point increase in the 30-year fixed rate.”
Measure of prices soars from one year ago.
Growth in US home prices picked up again in February.
A measure of prices in 20 US cities soared 20.2% from a year earlier, up from the 18.9% annual increase in January, the S&P CoreLogic Case-Shiller index showed Tuesday. All 20 cities saw double-digit price increases, with Phoenix, Tampa and Miami reporting the biggest year-over-year jumps.
Nationally, prices surged 19.8%, the third-biggest increase in data going back 35 years, according to Craig Lazzara, global head of index investment strategy at S&P Dow Jones Indices.
Demand for homes remains strong two years after the pandemic hit the US, spurring fierce bidding wars for a tight supply of listings. Rapidly rising mortgage rates -- now at a 12-year high -- are pushing some buyers to the sidelines, while others are racing to lock in deals before costs climb further.
While the housing market is now in its traditionally busiest season, signs of a potential cooldown may be emerging. With little to buy, purchases of previously owned homes slowed last month to the lowest level since June 2020.
“The macroeconomic environment is evolving rapidly and may not support extraordinary home-price growth for much longer,” Lazzara said in a statement. “We may soon begin to see the impact of increasing mortgage rates on home prices.”
Report reveals how housing affordability has changed in recent months.
Rising mortgage rates and surging nominal house prices continue to weaken housing affordability and shut homebuyers out of the market.
Consumer house-buying power decreased 3.6% between January and February and was down 6.8% year over year, First American Financial’s latest report revealed. The decline was driven by the sharp increase in mortgage rates and the 30.6% month-over-month increase in real house prices – the fastest growth in the more than 30-year history of the series.
“In the latest RHPI report reflecting February 2022 data, the 30-year, fixed mortgage rate stood at 3.8%. Since then, rates have increased sharply, breaking the 5% barrier in mid-April. The increase in rates since February reduced house-buying power by $60,000,” said First American chief economist Mark Fleming.
Median household income has grown 5.1% since January 2021 and 70.4% since January 2000, boosting house-buying power. However, Fleming said it was not enough to offset the affordability loss from higher rates and rapidly rising nominal prices.
“Rising mortgage rates and surging nominal house prices are expected to continue outpacing household income, so affordability will likely wane further nationally in the near term,” he added. “One forecast, based on an estimate of when the 10-year Treasury yield will peak, suggests that the 30-year fixed mortgage rate will likely peak between 5% and 5.7%, but may move as high as the low 6% range.”
If the average mortgage rate reached 5.5% – assuming a 5% down payment and average household income of roughly $70,800 – house-buying power would decline by an additional $21,000, according to Fleming. If rates rose even higher to 6%, house-buying power would fall by $40,000 compared with 5%.
“Recency bias may have many thinking that rates below 3% and house-buying power above $450,000 are normal, but it is anything but normal from a historical perspective,” Flaming said. “The last two years were the exception, not the rule, and the housing market is adjusting to a not-so-new normal.”
"As the market tightens in 2022, it will be interesting to see how lenders and borrowers respond".
Loan origination costs are on the rise again as the market continues to shift to a high-rate environment, according to a new CoreLogic report.
“As the mortgage industry comes off two years of record-low interest rates and red-hot consumer demand, lenders are now pivoting to address increasing headwinds from higher loan origination costs and lower origination volumes,” said Bob Jennings, executive at CoreLogic Underwriting Solutions.
The national average for mortgage closing costs for a single-family property rose 13.4% annually to $6,905, including transfer taxes and $3,860 excluding transfer taxes – up by 11.2% year over year.
Jennings pointed out that the 13.4% jump in purchase mortgage closing costs corresponds to a 13.2% year-over-year increase in lender origination costs, as per a Mortgage Bankers Association report.
Additionally, the report showed that closing costs have kept pace with rapidly increasing home prices. In 2021, the average US home price grew by more than $50,000, while average closing purchase closing costs were up by $818 including taxes and $390 excluding taxes.
Despite the increase in the absolute dollar amount of closing fees, closing costs as a percentage of home sales decreased slightly from 2020. The average purchase fees as a percentage of the average sales price in 2021 were 1.81% compared to 1.85% in 2020. When taxes are excluded, purchase fees as a percentage of sales price were 1.01% last year compared to 1.06% the previous year.
The report included the lender’s title policy, owner’s title policy, appraisal, settlement, recording fees, land surveys, and transfer tax as part of the total closing costs. The calculations use home price data from CoreLogic to estimate closing costs for an average home at the state, core-based statistical area (CBSA) and county levels.
“As the market tightens in 2022, it will be interesting to see how lenders and borrowers respond and how these key metrics move,” Jennings said.
The advantages of a 30-year mortgage versus a 15-year mortgage.
There are many factors to consider before deciding on a 30-year mortgage versus a 15-year mortgage—or simply paying off a 30-year mortgage early. Whether or not it is a good idea depends on a few key considerations.
Is it smart to pay off your house early?
Whether or not it is smart to pay off your house early is dependent on one key factor: the interest rate for your mortgage. During the current economic climate, however, when the COVID-19 pandemic has slowed the economy, it is a decent idea to keep your 30-year mortgage because those outside factors have pushed interest rates so low.
The best way to reduce your total interest can be to turn your 30-year loan into a 15-year loan—but you should ensure your budget allows for you to make the extra monthly payment. If you are thinking of paying off your house early, you should consider the following: if you can eliminate the debt you owe on any loan that has an interest rate higher than your mortgage; if your funds would be better used paying for your retirement, like an IRA or 401k; if you would feel more comfortable financially having an emergency fund, in case you fall ill or lose your job; and if you should put that money toward funding your children’s college education, which is a strong investment for them and a tax benefit for you.
Is it cheaper to pay off a 30-year mortgage in 15 years?
If you are considering paying off your 30-year mortgage in 15 years, it is important to consider if there is a pre-payment penalty on your loan. While a lot of lenders do not penalize you for paying off your mortgage early, some do—so it is a good idea to call your lender specifically to ask about any potential pre-payment penalty.
Since they come with lower monthly payments and allow you to have more purchasing power, 30-year mortgages are usually the most popular choice for homebuyers. Fifteen-year mortgages, on the other hand, have advantages particularly when it comes to paying less interest in the long run. The difficulty for most homebuyers comes with the higher monthly payments.
If you do go with a 30-year mortgage, you can still make extra payments each year, either toward a faster overall payment plan or simply to make the extra payment if and when you do have the funds. In either case, the extra payments should help you save on interest, pay off the mortgage more quickly, and possibly provide you with the best of both worlds.
Can you pay a 30-year mortgage in 15 years?
Yes. In fact, a lot of people get a 30-year mortgage with the expectation that they will pay it off in 15 years. If you are able to pay off your 30-year mortgage in 15 years, it would also be cheaper, since you would potentially save yourself 15 years’ worth of interest payments. Opting for that route isn’t so different from choosing a 15-year mortgage in the first place, the only difference being choosing to make those added payments would be your choice entirely.
Of course, it is important to remember that paying a 30-year mortgage in 15 years is less common since financial obligations can arise at any time. You might decide you need a vacation instead of making the extra payments or that your kitchen could use an upgrade, as a couple of examples. For these reasons, rather than paying a 30-year mortgage in 15 years, it is sometimes a better idea to take out a 15-year mortgage from the start. The reason for that option is you will not be tempted to spend those funds on anything else—you will have built-in accountability to get your home paid off more quickly.
Should you go from 15 to 30 years?
There are at least three reasons why you should opt for a 15-year mortgage over a 30-year mortgage, including:
You could save a significant amount of money.
A 30-year mortgage could end up costing 33%--or $100,000—more than a 15-year mortgage.
You could build home equity more quickly.
Paying back the principal balance of your loan—instead of simply the interest—is one way to build equity. If you are making larger monthly payments on a 15-year mortgage, you will pay down the interest much more quickly, freeing up more funds to put toward the principal each month. On 30-year mortgages, you pay less each month and therefore you pay off the interest more slowly.
You will pay off your house in half the time.
The difference, simply put, is that you will be in debt for 15 years rathe than 30 years.
Activity has not yet picked up during this time.
The usual trend of shrinking mortgage applications continued for the week ending April 15.
Overall mortgage applications dropped 5% on a seasonally adjusted basis – 4% if unadjusted – from one week earlier, according to the Mortgage Bankers Association (MBA).
Likewise, both refinance and purchase applications were also 8% and 3% lower than the previous week, respectively. Both percentages are significantly lower compared to the same time last year.
Joel Kan, associate vice president of economic and industry forecasting at MBA, said rapid inflation and tight monetary policies had pushed mortgage rates through the roof.
“The 30-year rate has increased 70 basis points over the past month and is two full percentage points higher than a year ago. The recent surge in mortgage rates has shut most borrowers out of term refinances, causing the refinance index to fall for the sixth consecutive week,” Kan said. “In a housing market facing affordability challenges and low inventory, higher rates are causing a pullback or delay in home purchase demand as well. Home purchase activity has been volatile in recent weeks and has yet to see the typical pick up for this time of the year.”
Meanwhile, the refinance share of mortgage activity also decreased to 35.7% from 37.1% the previous week. Only the adjustable-rate mortgage (ARM) share increased to 8.5% of total applications – the highest level since 2019.
“ARM loans typically have lower rates than fixed rate mortgages,” Kan said. “As this spread has widened, ARM loans have become more attractive to borrowers already facing home purchase loan amounts close to record highs.”
Chief economist provides greater insights on the impact of a hyperinflation.
Earlier this week, Fannie Mae released its March economic forecast, which suggested a possible “modest recession” in 2023. The news came shortly after MPA news editor Richard Torne caught up with Doug Duncan, chief economist of Fannie Mae, to dig deeper into the possibility of a recession.
In the MPA TV episode, Duncan talked about the impacts of the Russia-Ukraine war on the US housing market and the likelihood of a recession.
“The Fed will not be done with its job on bringing inflation back under control for some months and their messaging that they want to maintain lots of flexibility, but clearly they’re going to start raising rates. The question is, can they stem inflation without also creating a recession?” Duncan said. “That’s a difficult dance to do, and it is even more complicated, as with what’s going on in Ukraine.”
Duncan explained that the Fed’s rate hike would likely push mortgage rates to around 5%. Consequently, refinances will continue to decline, and the pace of home sales will slow down. However, Duncan expects the upward trend in house prices to continue, becoming more of a constraint to higher interest rates.
“Unquestionably, the probability of recession is higher today than it was even two months ago,” he said. “How high is it? It’s certainly not 50%, but we’re lowering our forecast. I don’t know exactly what the number will be, but you should expect that our forecast for growth for 2022 and 2023 will be lower than it was with regard to a hyperinflation. If we should probably define terms, something over 10% annualized, but I wouldn’t expect that.
“I do believe the Fed will act against it. And there are some supply issues that are being resolved gradually, which have contributed to the underlying rate of inflation, and those are starting to move in the right direction. So, I don’t think we’ll get to that 10% plus range, but it will be a while before we get back to 2%.”
Rising rates have an impact.
Sales of previously owned US homes fell in March to the lowest since June 2020 as historically low inventory paired with rising mortgage rates curbed purchases.
Contract closings decreased 2.7% in March from the prior month to an annualized 5.77 million, figures from the National Association of Realtors showed Wednesday. The figure was in line with estimates in a Bloomberg survey of economists.
“The housing market is starting to feel the impact of sharply rising mortgage rates and higher inflation taking a hit on purchasing power,” Lawrence Yun, NAR’s chief economist, said in a statement.
Long constrained by a lack of inventory and high prices, home buyers must now also contend with decades high inflation and rapidly rising mortgage rates -- now over 5% for the first time since 2018. With the Federal Reserve intent on bringing inflation under control, borrowing costs are set to climb further in the months ahead.
Given contracts usually take about a month or two to close, the data precedes the latest jump in borrowing costs.
The NAR data showed that the number of homes for sale increased from a month earlier, which is typical for this time of year, but were still 9.5% lower than a year earlier. At the current pace it would take two months to sell all the homes on the market. Realtors see anything below five months of supply as a sign of a tight market.
Home builders are racing to meet demand with new construction, but high materials costs, elongated delivery times and ongoing challenges finding skilled labor have inflated backlogs. That mismatch in supply and demand has put upward pressure on prices.
The median selling price rose 15% from a year earlier, to a record $375,300 in March. Sales are still muted in the lower price range where there’s limited inventory, while there’s more activity at the higher end, according to Yun.
Growing affordability concerns have pushed the chance to purchase a home out of reach for many buyers. First-time buyers accounted for 30% of sales last month, up from February but still historically low.
Cash sales represented 28% of all transactions in March, the most since 2014. Investors, who typically buy in cash and are therefore less sensitive to mortgage rates, made up 18% of the market.