US Mortgage Rates Soar Slowing Down Home Sales



The list of things that affect homebuyers’ mood is quite extensive. In fact, anything from the state of the economy and home prices to politics can affect someone’s willingness to buy. One of the most obvious factors that determine how likely people are to take out a mortgage, however, is the interest rate. After all, the amount of money necessary to cover the cost of lending will usually be directly related to someone’s likelihood of taking a large loan. With that being said, how are the current interest rates in the United States affecting the housing market? Not well.

Growing Costs

Over the last seven years, interest rates on mortgages have constantly been increasing. In fact, some of the highest rates since 2011 were seen in May of this year. This means that the cost of taking out a mortgage is continuously growing. Given that the median home value is also slowly going upward and the recent tax law changes, homebuyers may lack the motivation to purchase.

The Direct Relationship

When it comes to financial decisions, there are always factors that are directly related to the choice one makes. For example, prices of gas are directly related to someone’s potential car purchase as gas will be a repetitive variable cost. When it comes to the housing market, mortgage interest rates have the same role. Just consider, for example, what will be the most important factors in determining if someone signs a 30-year long loan agreement. Undoubtedly, the interest rate is extremely important.

Given the compounding nature of mortgage interest rates, a minor difference of 0.5 percent could mean tens of thousands of dollars. For instance, if someone takes out a $100,000, 30-year mortgage at an interest rate of 3.5 percent, they will repay a total of $161,656. If that same loan comes at the interest rate of 4 percent, the total amount will accumulate to $171,870. Thus, more than an additional $10,000 will have to be invested into the loan due to a minor change in the interest rate. If the mortgage is greater, this is even more impactful, as the differences could be measured in hundreds of thousands of dollars.

Facilitating a Slower Market

With interest rates growing, buyers are not as likely to purchase. Given their lack of motivation, home builders will not exactly be eager to construct new homes. After all, it makes no sense for businesses to build homes that will not be sold soon. Thus, the supply becomes limited and causes the prices to go up. After all, when the number of homes in the market is limited, the buyers will have to outbid one another. In the long-run, such practice will cause the prices to increase.

Sadly, this could throw the entire market into a vicious cycle. The prices continue to go up, and buyers are forced to seek greater mortgages. Given the growing interest rates, however, those mortgages come at a very high cost. Thus, the buyers’ motivation diminishes further. Luckily, with the improvements in the economy and the low unemployment, the interest rate should slowly decline. If they do, buying homes will become a common practice.

Tax Reform Uncertainty Exerting Influence Over Mortgage Rates

Now that the nomination Jerome Powell as the next chair of the Federal Reserve is official, along with the recent release of an encouraging jobs report, mortgage rates have more or less stabilized as analysts await the outcome of the Republican tax reform effort.

With the fluid state of the reforms to be included in the planned overhaul of the tax code — not to mention the uncertainty surrounding the GOP’s ability to unite the fractured groups that exist at both ends of the party’s ideological spectrum — the lack of clarity concerning the legislative efforts on tax reform will continue to exert some level of influence over mortgage rates until the matter is resolved one way or the other.

According to the most recently available information from Freddie Mac, the 30-year fixed-rate average is up by 0.33 points compared to one year ago, with the current rate checking in at 3.9 percent (compared to 3.57 percent at this point in the previous year). The 3.9 percent figure represents a .04 percent decline from the previous week (3.94 percent), while the 15-year fixed-rate experienced a similar week-to-week decline, dropping from 3.27 percent to 3.24 percent. The current rate of 3.24 percent represents an increase of .35 percent (2.88 percent) when compared to the previous year’s rate.

Even with the uncertainty surrounding the GOP’s looming tax reform efforts, most analysts expect mortgage rates to remain stable over the weeks to come. The state of the economy has not been subjected to nearly as much media scrutiny when compared to recent years, as the bulk of coverage has been devoted to foreign policy issues amid growing diplomatic tensions and the possibility of a subsequent military intervention. With less scrutiny, coverage of every minor wax and wane of the economy — which are typical and ought to be largely expected — has not caused the kind of sudden and unnecessary overreaction that so frequently exerts an undue influence over the economy at large.

Of course, the Federal Reserve has not altered its position regarding its plan to increase rates before 2017 comes to a close, and some analysts predict a clash at the onset of 2018, one in which housing prices could drop due to the expected rate increase signaled by the Fed. That being said, the week-to-week fluctuations in the mortgage rate had little effect on the overall level of mortgage rate activity: Refinancing, which made up just under half of the mortgage applications, experienced a minor decline in concert with a slight rise in home purchase applications.

As many analysts have pointed out, the minor fluctuations surrounding mortgage rates are expected to remain stable over the coming weeks thanks to the clarity provided by the strong recent jobs report as well as the confirmation of the Federal Reserve’s next chair. With tax reform representing the only lingering economic uncertainty, analysts are expressing confidence in their current projections due to the existence of just a single variable that remains unknown.

Investor Anxiety Over Global, Domestic Unrest Push Fixed Mortgage Rates to Two-Month Low

It is one of the most basic rules of economics: Any uptick in political unrest — whether it is global unrest, domestic unrest, or some combination of the two — consistently provokes anxiety among investors. The product of this anxiety can be seen in a multitude of ways, but the most common is the shift in investor focus away from stocks and toward bonds.

With these specific economic conditions, mortgage rates are almost always affected as well. It should come as no surprise, then, that the most up-to-date information provided by Freddie Mac reveals that the average 30-year fixed mortgage rate reached a new two-month low, dropping to an average of 3.89 percent.

The rate is still up from one year ago, when the average 30-year fixed mortgage rate checked in at 3.43 percent. That being said, many analysts have noted that investors — many of whom expressed high hopes for an economic boon in the form of sweeping fiscal reforms — have thus far ignored the near-constant political drama associated with the new administration in the White House.

It is possible that the most recent political turmoil ultimately comes to be viewed as an inflection point in which even the most optimistic of investors see it as less and less likely that the administration will be able to enact the kind of fiscal reforms that had been hoped for. If this is indeed the case, the impact of this increased level of apprehension and anxiety among investors may contribute to an even greater drop in mortgage rates over the weeks and months to follow.

Of course, it’s also possible that even with all the tension and turmoil — including the threat of military intervention in places all over the globe, not to mention the ongoing saber-rattling emanating from officials in both the United States and North Korea — will only have a relatively minor impact on mortgage rates. In fact, many experts expect mortgage rates to remain relatively stable in the coming weeks, as evidenced by the results of a recent survey conducted by, which showed that half of all the experts surveyed felt that mortgage rates should be expected to enjoy relative stability — at least in the short term.

There are other factors at play that are expected to influence mortgage rates, including the ongoing discussion among officials at the Federal Reserve regarding the potential for another rate increase in late 2017. While the Fed has been relatively transparent concerning its intentions — including in its plans to address the need to correct the balance sheet — analysts have nonetheless found it difficult to accurately predict the impact of the many different factors that might influence mortgage rates.

The economic ambiguity and the hazy expectations concerning the not-too-distant future is evident in the data recently released by MBA (the Mortgage Bankers Association), which showed that mortgage applications essentially remained unchanged over the same week in which fixed mortgage rates continued to fall. Additionally, the purchase index fell by two percent during that same period, and the refinance index increased by two percent. The latter increase serves as a strong indication that borrowers are increasingly recognizing the benefit of taking advantage of the two-month low in fixed mortgage rates by refinancing.

MBA’s data also revealed that although purchase application volume indeed dropped by nearly two percent as fixed mortgage rates hit a two-month low, the overall purchase application rate is still well ahead of 2016’s pace. While 47.8 percent of the loan application volume could be attributed to activity relating to refinancing, the purchase application volume is nonetheless close to 10 percent ahead of pace when compared to the previous year.

2016 U.S. Housing Market Faces Inventory Shortage

Barron’s has conducted an interview with Ivy Zelman, in which the famed housing analyst warns of a critical shortage of housing inventory in America. Zelman, who rose to prominence for betting against home builders in 2006, states in the interview that, four years into the post-recession housing recovery, America is still 35% below a normal level of housing starts.

Broadly, she observes that the cycle has been “elongated” and that the recovery slope has not been as steep as analysts previously believed it would be. The sluggish recovery has, in turn, impeded growth in home building and created a shortage of shelter, even as demand for homes has grown and driven prices up.

First-time homebuyers are being crowded out by the lack of affordable housing, whereas would-be sellers are shying away from putting their starter homes on the market due to fears that they cannot afford the next step up. Investors have snapped up low-end properties looking for returns, further exacerbating the shortage. Overall, the number of starter homes on the market has declined 43.6% in the past four years.

The National Association of Realtors found that total housing inventory by the end of 2015 dropped 12.3% to 1.79 million existing homes available for sale. Currently, total housing inventory is 3.8% lower than a year ago. Zelman concurs, noting that the “ U.S. is at a 30-year low of inventory available for sale.” As such, she predicts “double-digit housing-starts growth this year, next year, and in 2018.” Moreover, Zelman notes that there is a shortage of affordable housing concentrated at the low-end of the market, which large builders are only now addressing and making a killing while doing so.

This shortage comes at a time when millennial unemployment rates have dropped from a 14% peak to 7% and nonbanks are experiencing a boom in requests for FHA loans. Millennials, the oldest of whom are turning 34, are approaching an age where they are more likely to live in or seek single-family shelter, especially if they are married. Zelman cites figures showing that 70% of households 40 years of age or older and 80% of married couples live in single-family shelters.

One impediment to housing starts is impact fees, which can reach prohibitively high levels and make it impossible for builders to profit from low-end housing construction. There is a positive correlation between low impact fees and robust housing start growth, Zelman observes.

In addition, the occupancy rate of single-family rentals in the U.S. is a staggering 97%. Sensing demand and an opportunity, single-family rental operators continue to snap up 10% to 15% of new single-family homes. As new houses are acquired by rental operators and people are pushed to rent due to low inventory levels, the market becomes more susceptible to inflationary increases in housing costs.



7-Year High for New Home Sales

8.3.16 | 7 Year High for New Homes Sales – Rusty Tweed team

7 Year High for New Homes Sales - Rusty Tweed team

Demand Remains High for New Homes

Sales of new homes across the U.S. increased by 10% in the second quarter as prior month sales data were revised upward. Revisions to March, April and May data increased the sales tallies for those months by a total 22,000. The average pace across the second quarter, 576,000, is 10% more than the 524,000 for the first quarter.

Earlier this week, the Commerce Department reported that June sales rose by 3.5% to a seasonally adjusted rate of 592,000. This was above the economists’ prediction of 560,000 new units being sold a month. The median price of a new home is $306,700, 6% more than a year ago. New home sales are currently at their strongest since the recession hit in 2008.

The biggest surge in new home sales happened in the Midwest and West (the most significant surge since November 2007) seeing prices rise by over 10%. Both areas have seen a sharp rise in home prices within tight inventories. In the Northeast and South, sales actually dipped slightly. The Northeast saw sales fall by 5.6% whereas they only slipped by 0.3% in the populous South.

Barclays analyst Rob Martin wrote, “Despite some softness in prices reported earlier today, the housing market remains healthy. We expect housing to continue to firm, on average, over the medium term, with a buoyant household sector supporting both prices and volumes.”

New home purchases are only a tenth of all home sales; however, the data arrives amidst a host of other signs that growing numbers of Americans are buying homes. Strong job growth, slightly looser lending standards and historically low mortgage rates are all contributing to the surge in home purchases.

Rise in Confidence from Home Builders

Home builders are showing increasing amounts of confidence. Last week, PulteGroup (PHM) reported that it would be expanding its stock buyback program in the light of better-than-predicted earnings and revenue.

If builders do increase their construction this year, there are hopes this will help lift the wider economy. However, there are fears that mortgage rates will rise if the Federal Reserve raises a key interest rate, as is widely believed will happen later this year. The Fed, meanwhile, has indicated that any rate increases from the current near zero will be minimal and gradual. Economists believe that demographic shifts, including younger Americans starting families and continued growth in the labor market, will help the housing market overcome such obstacles.

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