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Home Buying Is 5% Cheaper Than a Week Ago

Mortgage rates are falling—at least for now—after posting rapid jumps in June. Over the last two weeks, the 30-year fixed-rate mortgage has dropped by one-half of a percentage point. Home buying is about 5% more affordable than a week ago, translating to about $100 less in monthly mortgage payments, economists at the National Association of REALTORS® wrote on the Economists’ Outlook blog.

Rates are dropping as concerns mount over a possible economic recession, says Sam Khater, Freddie Mac’s chief economist. “While the drop provides minor relief to buyers, the housing market will continue to normalize if home price growth materially slows due to the combination of low housing affordability and an expected economic slowdown,” Khater says.

Freddie Mac reports the following national averages with mortgage rates for the week ending July 7:

• 30-year fixed-rate mortgages: averaged 5.30%, with an average 0.8 point, dropping from last week’s 5.70% average. Last year at this time, 30-year rates averaged 2.90%.
• 15-year fixed-rate mortgages: averaged 4.45%, with an average 0.8 point, dropping from last week’s 4.83% average. A year ago, 15-year rates averaged 2.20%.
• 5-year hybrid adjustable-rate mortgages: averaged 4.19%, with an average 0.4 point, falling from last week’s 4.50% average. A year ago, 5-year ARMs averaged 2.52%.

Freddie Mac reports commitment rates along with average points to better reflect the total upfront cost of obtaining the mortgage.

©National Association of REALTORS®
Reprinted with permission

Rapid Rise in Mortgage Rates Stalls

The quick rise in mortgage rates over the last few weeks is taking a pause. The 30-year fixed-rate mortgage averaged 5.7% this week, dropping from last week’s 5.81%, according to Freddie Mac. Still, rates remain well above where they were a year ago, when they averaged below 3%. Higher rates have been sending shock waves through the housing market, potentially adding hundreds of dollars to monthly mortgage payments and spooking interested home buyers.

Since the beginning of the year, home buying has cost about $800 more every month, Nadia Evangelou, senior economist and director of forecasting at the National Association of REALTORS®, wrote on the association’s blog. The higher mortgage rates have hurt affordability, and fewer middle-income home buyers can now afford to buy homes, Evangelou notes.

“The rapid rise in mortgage rates has finally paused, largely due to the countervailing forces of high inflation and the increasing possibility of an economic recession,” says Sam Khater, Freddie Mac’s chief economist. “This pause in rate activity should help the housing market rebalance from the breakneck growth of a seller’s market to a more normal pace of home price appreciation.”

Freddie Mac reported the following national averages for the week ending June 30:

• 30-year fixed-rate mortgages: averaged 5.7%, with an average 0.9 point, dropping from last week’s 5.81% average. Last year at this time, 30-year rates averaged 2.98%.
• 15-year fixed-rate mortgages: averaged 4.83%, with an average 0.9 point, dropping from last week’s 4.92% average. A year ago, 15-year rates averaged 2.26%.
• 5-year hybrid adjustable-rate mortgages: averaged 4.5% this week, with an average 0.3 point, rising from last week’s 4.41% average. A year ago, 5-year ARMs averaged 2.54%.

Freddie Mac reports commitment rates along with average points to better reflect the total upfront cost of obtaining the mortgage.

©National Association of REALTORS®
Reprinted with permission

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New-Home Costs Rising at Unparalleled Rate

Inflation is pushing up homebuilding costs at an unprecedented rate, according to Bank of America’s Who Builds the House? report. Supply-chain disruptions and labor shortages are adding pressure to rising prices.

The average cost for materials to build a single-family home jumped 42% from 2018 to 2021, adding thousands of dollars to the price of a new home, according to the report. The median sales price of a new home in April reached a record $450,600, a 20% hike from a year earlier, Commerce Department data shows.

The higher material costs have been passed along to home buyers, who are facing the double whammy of rapidly rising mortgage rates. First-time buyers, in particular, are increasingly becoming priced out of the new-home market, with only about 10% of new homes in April on the market priced at less than $300,000, according to the National Association of Home Builders. A year prior, that share was 25%.

As buyers back away from the new-home market, builders are slowing production. Housing starts have fallen to a 13-month low, and single-family construction dropped 9.2% in May, according to the Commerce Department.

“Residential construction material costs are up 19% year over year, with cost increases for a variety of building inputs, except for lumber, which has experienced recent declines due to a housing slowdown,” says NAHB Chief Economist Robert Dietz. What’s more, “The increase for mortgage rates for the first half of 2022 has priced out a significant number of prospective home buyers.”

Some builders are reducing their prices. For example, the share of new-construction homes with price cuts has quadrupled compared to a year earlier in metro areas like Austin, Texas, and Nashville, Tenn., according to Redfin data. Price cuts in new construction have tripled in Phoenix and doubled in Tampa, Fla.

Stuart Miller, executive chairman of homebuilder Lennar, told CNBC that he expects prices will readjust moving forward due to higher mortgage rates, which have nearly doubled over the past year. Rising material costs combined with accelerating mortgage rates have left buyers facing “a little sticker shock, and that will likely lead to a pause … and then some reconciliation,” he said. “But there is still a housing shortage across the country. We’ll adjust prices as need be. … Pricing may come down a bit to accommodate affordability. But America still needs homes, and we’ll continue to fill that void.”

Building Material Woes Continue

Framing lumber and engineered wood have experienced the largest price increases among materials, according to the Bank of America report. Lumber prices have been volatile over the past year; prices hit an all-time high in 2021, adding $18,600 to the average cost of a new home, according to the NAHB. However, lumber prices have fallen in recent weeks and are trading at yearly lows, though they are still higher than in 2020. Still, housing analysts say it likely will take time before consumers see any savings due to the price dip.

Other material costs in home construction also have contributed to rising prices, such as upticks in concrete, flooring and paint. The price of exterior paint jumped 14.5% in the first five months of this year, the NAHB notes. Window and door shortages, which have been blamed for many construction delays, also have added to costs. The plumbing sector has been hit hard by a labor shortage that is also leading to delayed timelines, builders note.

Further, inflation is adding to consumer costs in household furnishings, which saw prices climb 9.3% annually in January, according to the Labor Department. Appliances were up 8.5%, and floor coverings up 7.2% in the same time period.

©National Association of REALTORS®
Reprinted with permission

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Mortgage Rates Rise Modestly to 5.81%

Mortgage rates inched closer to 6% this week. The 30-year fixed-rate mortgage averaged 5.81%, up modestly from 5.78% last week, according to Freddie Mac. Borrowing costs are mounting higher and higher for potential home buyers, who now find themselves squeezed both financially and by low inventory.

“Since the beginning of the year, home buying has cost about $800 more every month,” Nadia Evangelou, senior economist and director of forecasting for the National Association of REALTORS®, writes on the Economists’ Outlook blog. “These higher mortgage rates hurt affordability, and middle-income home buyers can afford to buy fewer homes. Even though inventory has increased 13% since January, not all home buyers can afford to buy these additional homes. In fact, in order to be able to afford those homes, it appears that buyers need to earn more than $150,000 per year.”

Still, rising rates are tamping down previously frenzied demand, which may be a positive thing for the market. “The combination of rising rates and high home prices is the likely driver of recent declines in existing-home sales,” says Sam Khater, Freddie Mac’s chief economist. “However, in reality, many potential home buyers are still interested in purchasing a home, keeping the market competitive but leveling off the last two years of red-hot activity.”

Freddie Mac reports the following national averages for mortgage rates for the week ending June 23:

• 30-year fixed-rate mortgages: averaged 5.81% with an average 0.8 point, up from last week’s 5.78%. A year ago, the 30-year fixed-rate mortgage averaged 3.02%.
• 15-year fixed-rate mortgages: averaged 4.92% with an average 0.9 point, up from last week’s 4.81%. A year ago, the 15-year fixed-rate mortgage averaged 2.34%.
• 5-year hybrid adjustable-rate mortgages: averaged 4.41% with an average 0.3 point, up from last week’s 4.33%. A year ago, the five-year ARM averaged 2.53%.

Freddie Mac reports commitment rates along with average points to better reflect the total upfront cost of obtaining a mortgage.

©National Association of REALTORS®
Reprinted with permission

Affordability Crisis for Lawmakers

Leaders from the National Association of REALTORS® made the case to members of Congress and their staff on Tuesday that housing affordability is rapidly deteriorating and action is needed to keep homes financially accessible to buyers. In an exclusive virtual briefing, NAR President Leslie Rouda Smith told congressional leaders that for too many Americans the cost of buying a home remains a barrier to property ownership—a primary pathway to generational wealth-building.

“Enabling more households to achieve and maintain homeownership is crucial to narrowing racial wealth gaps,” Rouda Smith said. “But with rising mortgage rates and a persistent shortage of affordable homes, homeownership opportunities are limited for many middle-class, first-time and first-generation home buyers.”

Three Forces Driving the Housing Market

Jessica Lautz, NAR’s vice president of demographics and behavioral insights, said at the briefing that inflation, rising mortgage rates and inventory are driving changes in the housing market. “For a $300,000 mortgage—one that the typical first-time home buyer would probably feel pretty comfortable entering into—we know that their monthly payment has jumped to $1,800 from $1,300 just at the beginning of the year. That is quite a jump,” Lautz said. “It means there are a lot of people who are going to say, ‘I cannot afford to enter the housing market.’”

Watch the webinar recording and download Lautz’ presentation at NAR’s National Homeownership Month page.

NAR data, which lawmakers in Washington rely on as they craft policy and propose new housing legislation, shows that inventory remains stubbornly low. “Even with this rise in mortgage rates, even with fewer buyers coming into the market, we still have seen nearly a 15% year-over-year home price increase. We are seeing this in nearly every major city across the country,” Lautz said. “We are seeing this in places where we haven’t seen it before. We are talking about 123 straight months of year-over-year home price gains.”

Lautz said she expects that as the market cools, home sales will return to pre-pandemic levels. But lingering supply issues mean home prices will remain elevated.

NAR’s landmark 2021 report, “Housing Is Critical Infrastructure,” showed an underbuilding gap of 5.5 million units—a gap so large it would take more than a decade to correct. NAR advocates an all-of-the-above approach to closing the supply gap, including zoning reform, money for new construction, increased labor, and tax incentives to convert unused commercial space to residential.

Racial Homeownership Divide Worsens During Pandemic

The briefing also gave Capitol Hill policymakers a snapshot of how the racial homeownership divide grew deeper during the pandemic. Lautz presented NAR data showing that the homeownership rate for White Americans today is more than 72% while it’s just 43% for Black Americans. “That gap is as wide today as when the Fair Housing Act began back in 1968,” Lautz said.

Student loan debt is especially burdensome to Black home buyers, according to NAR’s analysis. “Forty-one percent of [recent] Black home buyers had student loan debt; that is higher than any other race,” Lautz said. “And if you are a first-time home buyer, you don’t have equity from that previous home.” NAR data shows that 38% of recent White home buyers were able use past home equity to help finance a down payment. In comparison, only 21% of Blacks, 25% of Hispanics, and 16% of Asians could do so.

Millennials Now Command the Housing Market

Millennials, now the biggest generation in America, are “impacting everything we do,” Lautz told lawmakers. “And it is one of the reasons why we are missing 5.5 million units in the U.S.”

About 32 million young adults are nearing their peak homebuying age. They’re spending less on transportation than past generations did at their age, but they’re spending more on housing and education. “Sixty percent of millennials who are not homeowners today are saying that student loan debt is one of the biggest hurdles delaying them from purchasing a home,” Lautz said.

The other significant shift in the data is a drop in U.S. birth rates. The segment of home buyers with a child under the age of 18 has dropped from a share of 58% in 1985 to just 31% today. “We are absolutely seeing that reflection in the data on home buyers,” Lautz said. “It is going to shift a few factors: You need a smaller home if you don’t have a growing family, and the other big factor is where that home is.” Households without kids may cast a wider net in their home search, seeking more affordable options, rather than limiting their search based on school districts. 

©National Association of REALTORS®
Reprinted with permission