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.

Sharp Upward Trend Continues in Toronto Housing Market

The United States is not the only nation experiencing the return of a booming real estate market: Our neighbors to the north are also in the midst of a similarly extended surge in the marketplace, and it is the renewed strength of the Canadian economy that has powered this upward trend in the average price of existing home sales. Our analyses indicate Toronto is perhaps the most salient example highlighting this continued upward trend, particularly since the city’s average home sale price checked in at $1.2 million in the last month, increasing at a rate representing a 28-year high.

After reviewing each category of housing within Toronto’s city limits — including detached homes, condominiums, and townhouses — it is evident that the sharp increase in the average sale price applies more or less equally to the different types of housing. Even with the 33-percent increase in prices across all housing categories encouraging a 15-percent increase in new listings put on the market, the Toronto housing supply still remains limited by any measure.

Although the sudden increase in equity would lead most economists to predict a continued increase in the number of real estate listings — thereby introducing more balance within the market — our research indicates that many homeowners are still somewhat reluctant to cash in on their gains by putting their home on the market. It is somewhat ironic, but here at Tweed Economics we believe this might be the product of the limited housing supply leaving few good options for potential sellers who wish to remain in the city of Toronto.

City officials are looking at the limited supply of real estate as an issue that may need to be addressed through some sort of government intervention. Throughout our many years working in similar markets in which limited supply issues can be overcome with off-market expertise, intervention by government entities — despite wholly good intentions — all too often leads to unintended consequences that only exacerbate an existing issue or create new, more complex issues.

Various city officials have intimated potential steps they might take to intervene, citing the current lack of affordable housing as a deterrent for first-time homebuyers who wish to live and work in Toronto. This is certainly problematic, and city officials are right to be concerned about a continued lack of supply preventing potential buyers from entering the real estate market. Without first identifying the precipitating factors and understanding how each of these factors influences the market, outside intervention will almost certainly lead to a host of newer and more complicated problems for city officials to handle.

As Toronto city officials discuss the possibility of implementing a vacant-home tax or a foreign-buyers levy in the hopes of reducing real estate speculation, it’s worth pointing out that it is typically ideal to simply allow the market to self-correct. With home values continuing to soar in Toronto, it seems likely that potential sellers in the city will ultimately decide to take advantage of a strong marketplace rather than standing on the sidelines as others reap the rewards of the sharp rise in home equity.



The Top 20 U.S. Housing Markets of 2016

A study conducted by Forbes and Local Market Research, a company that tracks home pricing and economic data, has yielded a list of the top 20 United States cities to invest in real estate. To compile the rankings, Local Market Research evaluated the 100 largest Metropolitan Statistical Area and Divisions, each with populations in excess of 600,000, and screened them for healthy job growth rates, population growth, and anticipated home price appreciation using local income and housing data.

Cities with healthier employment growth rates were weighed favorably in the rankings. Thus, Grand Rapids, Michigan topped the list while Tampa, Florida placed fourteenth even though the two cities share a robust population growth rate, due to the difference in job growth rates. Grand Rapids enjoyed 3.9% employment expansion in the 12 months leading up to November 2015 whereas Tampa plodded along at a comparably lower 2.6%.

Overall, Florida performed admirably in the survey, with seven Floridian cities making the list, due to the stabilization of the national economy. The economic recovery following the 2008 recession has prompted retirees, vacationers, and other potential home buyers to return to the Sunshine State, creating jobs and local economic growth.

The U.S. housing market has been strong in spite of stagnant wages and a volatile stock market. New home sales have hit their highest level since 2008, CNN Money reported earlier this year, with shares of the home price tracker, Zillow, jumping 20%. The influx of first-time buyers has also bolstered the housing market.

This confluence of factors could result in a “trickle-up effect,” said Thomas Wilson, an investment manager at Brinker Capital, to CNN Money. “More first-time buyers are entering the market, which makes it easier for people to sell.” The rebound in housing prices and sales could, in turn, spark a boom in retail sales due to the wealth effect.

However, the combination of rising housing prices and stagnating wages has also lowered home affordability, even as the economic rebound has driven investment into real estate.

“More low-income Americans will be priced out of homeownership. Home values are rising faster than incomes, so in 2016, the poorest Americans will be unable to afford even the least expensive homes,” according to Zillow.


U.S. Home Prices See Significant Increase in Second Quarter

08.26.2016 | U.S. Home Prices See Significant Increase in Second Quarter – Rusty Tweed team

FHFA Report Shows Home Prices Rising Higher than Expected

The second quarter saw a 5.6% increase in U.S. home prices from the previous year, creating concerns about affordability for buyers.

According to a Federal Housing Finance Agency (FHFA) report issued earlier this week, prices increased 1.2% (on a seasonally adjusted basis) from the previous three months. The Federal Housing Finance Agency said that June prices climbed 0.2 on a seasonally adjusted basis from May.

21 economists had forecast a 0.3% gain, including Andrew Leventis, the agency’s supervisory economist.

“Although the appreciation rate for the second quarter was of similar magnitude to what we’ve been seeing for several years now, a close look at the month-over-month price changes during the quarter reveals a potentially significant market shift,”  Leventis said in a statement. The increase was only 0.2% in each of the three months, a more modest appreciation rate that “most likely reflects accumulated pressures from significantly reduced home affordability.”

U.S. Home Prices See Significant Increase in Second Quarter - Rusty Tweed team

Significant FHFA Report Findings
  • In every U.S. state, except Vermont, home prices rose between the second quarter of 2015 and the second quarter of 2016.  The topmost five states in annual appreciation were:  1) Oregon 11.7%; 2) Washington 10.3%; 3) Colorado 10.2%; 4) Florida 10.0%; and 5) Nevada 9.6%.
  • Among the U.S.’s 100 most populated metropolitan areas, annual price increases were highest in North Port-Sarasota-Bradenton, FL, which saw prices rise by 15.7%.  Prices were at their weakest in Bridgeport-Stamford-Norwalk, CT, where they dropped by 3.3%.
  • Of the nine census divisions, the strongest increase in the second quarter was seen in the Mountain division, posting a 1.9% quarterly increase and an 8.1% growth on the second quarter of last year.  House price appreciation was at its lowest in the Middle Atlantic division, where prices rose a mere 0.6% from the last quarter.

The FHFA index measures transactions for single-family properties financed with mortgages owned or securitized by government-sponsored Fannie Mae and Freddie Mac. It does not provide prices.

National Association of Realtors Report Shows Home Price Growth is Most Significant in Metro Areas

The latest report from the National Association of Realtors issued earlier this month also showed home prices hanging onto their forceful, upward trajectory in most metro areas during the second quarter. The rise in home prices is a factor in the decline of affordability in spite of mortgage rates currently hovering at their lowest in more than three years.

In the U.S., prices have overall risen as the demand for housing has outstripped supply. The second quarter saw a total of 5.5 million homes, including single-family houses and condominiums, change hands, up 4.2% from a year earlier, according to the National Association of Realtors. The transactions are from a dwindling group of available properties. 2.12 million homes were listed for sale at the end of the quarter, down 5.8%, the NAR said.

The national median price of an existing single-family home rose to $240,700 in the second quarter, up 4.9% from a year earlier. The report also revealed that for the very first time, a metro area (San Jose, California) had a median single-family home price higher than $1 million.

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Housing Market Signs of Growth

8.4.2016| Housing Market Signs of Growth – Rusty Tweed team

Home Prices Have Hit a Record High

The housing market is one of the only areas of the economy that is doing remarkably well right now.

Many big retailers are facing challenging times, Macy’s and Target among them. Wage growth remains slow. The stock market’s volatility continues. The recent growth in oil prices could further impact on consumer spending.

Housing Market Signs of Growth - Rusty Tweed team

However, home prices have hit a record high. New home sales have reached their highest level since before the 2008 crash.

Big homebuilders KB Home (KBH) and Pulte (PHM) saw their stocks rise as home sales have rallied.

Shares in Zillow, the home price tracker on the web, have also increased by over 20% this year.

Other Key Indicators of Growth in the Housing Market

A further sign of housing strength is the fact that DIY stores such as Lowe’s (LOW) and Home Depot (HD) have also recently reported strong earnings. Few other retailers have much cause for celebration. Although as a result of the housing market rebound, other retail sales may also see a boost, according to Brinker Capital senior investment manager, Thomas Williams.

Williams said, “There is a trickle-up effect. More first-time buyers are entering the market, which makes it easier for people to sell”.

There are already fears that the latest housing bubble could lead to a similar one we saw in the mid 2000s that was a key cause of the subprime mortgage crisis and consequent recession.

Manager of the Hodges Small Cap fund said, “Normal recessions are caused by excess somewhere in the financial system.”

However, that level of excess is not apparent in the housing market. In fact, some areas of the country are still trying to make a comeback from the 2008 downturn.

It’s also worth stating that the cause of the most recent recession rarely causes the next one. The recession prior to 2008 was largely a result of a tech bubble in 2000 — not excess in the housing market.

Housing weakness in some markets has gotten worse because of the huge pullback in oil price. But if the recovery in the energy markets last, then home sales in states like Texas, Louisiana and North Dakota could also recover.

If the Federal Reserve raises interest rates,  that may also prompt prospective homebuyers to take action quickly before mortgage rates climb too much.

References for Housing Market Signs of Growth – Rusty Tweed team: