Mortgage credit availability loosened in December, even as house hunters continue to face higher prices that are hampering affordability, according to the Mortgage Bankers Association.

MBA’s Mortgage Credit Availability Index posted its highest reading since May 2021. However, credit availability is still 30% below pre-pandemic levels.

“Credit supply increased in December, with growth across both conventional and government segments of the market,” Joel Kan, MBA’s associate vice president of economic and industry forecasting, said in a news release. “December’s growth was driven by more ARM and lower credit score loan programs, which was likely due to a combination of the rising rate environment and affordability challenges. Lenders expanded offerings to qualified borrowers who were the most impacted by these market conditions. Additionally, there was an increase in government streamline refinance programs to aid borrowers still looking to refinance before rates rise even more.”

The MBA report also notes a 34% increase in jumbo credit availability.

Home prices continue to rise. The median existing-home price for all housing types in November was $353,900, up 13.9% compared to a year earlier, the National Association of REALTORS® reports.

As home prices press higher, so is the amount that home buyers are borrowing to pay for a house. The average amount borrowed to finance a home purchase climbed to $414,115 in November, according to MBA.

National Association of REALTORS®
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The average dollar amount of a mortgage purchase application hit a record of $418,500 as higher home prices force buyers to borrow more, the Mortgage Bankers Association reported this week.

“The continued rise in purchase loan application sizes is driven by high home price appreciation and the lack of housing inventory on the market—especially for entry-level homes,” says Joel Kan, vice president of economic and industry forecasters for the MBA. “The slower growth in government purchase activity [like in VA or FHA loans] is also contributing to the larger loan balances and suggests that prospective first-time buyers are struggling to find homes to buy in their price range.”

Home prices have been rising rapidly over the past year by double-digit percentages. The median existing-home price for all housing types in December was $358,000, up 15.8% compared to a year earlier ($309,200). Last month, every major region of the U.S. posted price gains, led by the South (up 20% compared to a year ago), according to the National Association of REALTORS®’ latest home sales report.

Down payments have also gotten larger. Buyers in the country’s 50 largest metros brought an average $46,283 to closing, according to a new study from LendingTree. View a breakdown of average down payments.

National Association of REALTORS®
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Mortgage rates are on the rise in the new year, just like economists predicted. The 30-year fixed-rate mortgage, which is up 45 basis points in less than a month, averaged 3.56% this week compared to 3.11% in the last week of 2021.

“Mortgage rates moved up again as the 10-year U.S. Treasury yield rose and financial markets adjusted to anticipated changes in monetary policy that will combat inflation,” says Sam Khater, Freddie Mac’s chief economist. “As a result of higher mortgage rates, purchase demand has modestly waned in advance of the spring homebuying season. However, supply remains near historically tight levels and home prices remain high, keeping the market competitive.”

Freddie Mac reports the following national averages with mortgage rates for the week ending Jan. 20:

• 30-year fixed-rate mortgages: averaged 3.56%, with an average 0.7 point increase from last week’s 3.45% average. Last year at this time, 30-year rates averaged 2.77%.
• 15-year fixed-rate mortgages: averaged 2.79%, with an average 0.6 point increase, up from last week’s 2.62% average. A year ago, 15-year rates averaged 2.21%.
• 5-year hybrid adjustable-rate mortgages: averaged 2.60%, with an average 0.3 point increase, rising from last week’s 2.57% average. A year ago, 5-year ARMs averaged 2.80%.

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

National Association of REALTORS®
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The number of owners who can save by refinancing is down by more than half from the start of this year to 5.9 million, according to Black Knight data. Black Knight considers refinance candidates as 30-year mortgage holders who have a maximum 80% loan-to-value ratio, a credit score of 720 or higher, and a likelihood of reducing their current first lien by at least 0.75%.

The average 30-year fixed-rate mortgage has climbed by about 50 basis points in the first weeks of the year.

Still, even with recent mortgage rate increases aside, many of those 5.9 million borrowers could still see savings of $275 a month per borrower, according to Black Knight. More than 1 million of them could save at least $400 a month, and 661,000 borrowers could trim $500 or more from their monthly mortgage at current rates.

The remaining borrowers may have missed the opportunity to save by not refinancing when mortgage rates were below 3%. The number of refinance candidates has dropped significantly from about 11 million at the start of the year and is down by about 20 million in late 2020.

Mortgage applications to refinance a home are down by half from a year ago, the Mortgage Bankers Association reports.

Nearly 18 million homeowners have refinanced over the last two years.

While many homeowners over the last two years have taken advantage to lower their mortgage payments, they’ve also quickly accumulated equity, in record amounts. A sharp increase in home prices has meant that, in the last year, homeowners have gained an average of $50,200 in equity, according to data from the National Association of REALTORS®.

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The fear of missing out, or “FOMO” as it’s called on social media, could prove to be a strong motivation for potential home buyers to enter the market quickly as mortgage rates rise. The potential loss of homebuying power may “supercharge the housing market ahead of the spring homebuying season,” says Mark Fleming, chief economist at First American Financial Corp., in a recent analysis.

The average 30-year fixed-rate mortgage has climbed by about 50 basis points in the first weeks of the year. Last week, rates averaged 3.56%, up from 2.77% a year ago, Freddie Mac reports.

The Federal Reserve has signaled an end to ultra-low rates, which observers expect to start climbing as soon as March. Mortgage rates tend to follow long-term bond yields, which also are expected to increase due to the Fed’s tightening of its monetary policy and its efforts to control inflation.

Economists foresee a 30-year fixed mortgage rate of 3.7% by the end of 2022, according to the National Association of REALTORS®. That still reflects a historically low rate but is well above what buyers have grown accustomed to in recent years.

“When mortgage rates increase, holding income constant, consumer house-buying power decreases,” Fleming says.

A scenario Fleming offers suggests that if the average mortgage rate stayed at its current level of about 3.5% through the spring homebuying season, assuming a 5% down payment and holding average household income constant at the November 2021 level of $69,800, homebuying power would fall by about $25,000. If rates increase to 3.7% by the end of 2022, however, homebuying power would drop by $36,000 compared to November 2021, while if mortgage rates reach 4%, homebuying power would fall by nearly $52,000.

“Rising mortgage rates impact affordability, but one of the root causes of rising mortgage rates is an improving economy, and an improving economy often leads to stronger wage growth,” he says. If incomes continue to increase at the current rate through the end of 2022, income growth could reduce the projected decline in homebuying power this year to a less severe $700 instead of $36,000, Fleming says.

National Association of REALTORS®
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Mortgage rates held steady overall this week, a welcome relief to home shoppers who may have been watching them rise week after week since the beginning of the year.

The 30-year fixed-rate mortgage averaged 3.55% this week, Freddie Mac reports.

“Following a month-long rise, mortgage rates effectively stayed flat this week,” says Sam Khater, Freddie Mac’s chief economist. “Recent rate increases have yet to significantly impact purchase demand, as history demonstrates that potential home buyers who are on the fence will often enter the market at the state of rate increase cycles.”

Economists are predicting that mortgage rates will continue to gradually increase over this year. The National Association of REALTORS® predicts rates to average 3.9% by the end of this year.

Freddie Mac reports the following national averages with mortgage rates for the week ending Jan. 27:

• 30-year fixed-rate mortgages: averaged 3.55%, with an average 0.7 point, dropping slightly from last week’s 3.56% average. Last year at this time, 30-year rates averaged 2.73%.
• 15-year fixed-rate mortgages: averaged 2.80%, with an average 0.6 point, rising slightly from last week’s 2.79% average. A year ago, 15-year rates averaged 2.20%.
• 5-year hybrid adjustable-rate mortgages: averaged 2.70%, with an average 0.2 point, rising from last week’s 2.60% average. A year ago, 5-year ARMs averaged 2.80%.

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

National Association of REALTORS®
Reprinted with permission

Investors and move-up buyers will keep home sales humming, but inflation and other issues could be hurdles.

Key Takeaways:

• Mortgage rate increases will hamper housing affordability in 2022. First-time buyers will need your expertise to get out from under annual rent increases.
• Current homeowners may find themselves ‘mishoused’ as a result of the pandemic and seek out new lifestyle choices.
• Commercial real estate remains strong, though the office sector can expect rent concessions to continue in 2022. Tax incentives or extra government funding may be needed to repurpose underused office space.

“It was the best of times, it was the worst of times … it was the spring of hope, it was the winter of despair.” Those are the words of Charles Dickens in A Tale of Two Cities as he described the times surrounding the monumental French Revolution.

In many ways, Dickens’ words are applicable to the way the COVID-19 pandemic—now in a new phase with the emergence of the omicron variant—has upended our daily lives. We’ve lost more than 800,000 Americans to the virus. The employment market is improving but not back to pre-pandemic levels. Many workers have quit their jobs, and there seem to be “help wanted” signs in windows on every street in America. Inflation is quietly stealing our purchasing power. Homelessness is highly visible in major cities. Contempt for differing viewpoints is running high.

The times right now feel like something of a revolution.

Yet, there is more wealth accumulation in the country than ever before. Despite some volatility, the stock market hit new highs last year, and home prices consistently increased. Americans’ total net worth rose by $31 trillion between the onset of the pandemic and the middle of 2021, the largest hike ever in an 18-month period.

“Investors may have looked to the past to find that real estate is a very good hedge against inflation.”

Housing Shines Bright

Home sales are at their best in 15 years. Once all the data are tallied up, more than 6 million existing homes and about 800,000 newly constructed homes will have been sold in 2021—the best performance since 2006. Sales in recent months have been a bit lower compared with the same period last year, when we experienced intense bidding wars. Still, 2021 will finish meaningfully higher than 2020, which was affected by the spring pandemic lockdown.

The pandemic boosted housing demand as people sought larger homes in less crowded areas. But the magical power of low interest rates played a greater role, as it always does. Mortgage rates averaged 3.9% in 2019 but have hovered near 3% since the onset of the pandemic, helping to lower monthly mortgage payments. That interest rate drop represents about $150 per month in savings for buyers with a $300,000 loan, reducing the monthly payment from $1,415 to $1,265.

However, affordability conditions are changing. Home prices have increased by 25% since March 2020. The $300,000 loan now turns into $375,000. Even with low interest rates, the monthly mortgage payment shoots up to $1,581. The initial relief brought by lower interest rates is wiped out by higher prices, especially impacting first-time buyers. That’s why first-time buyers now account for less than 30% of home sales, down from 35% in the early months of the pandemic.

Current homeowners are faring much better, though, because they can use the proceeds from a home sale to buy their next property. In fact, homeowners nationwide have accumulated $5 trillion in equity during the pandemic, or around $67,000 for a typical owner. In the superexpensive San Francisco market, the typical owner has seen a large, juicy gain of $300,000. For renters in the Bay Area, it has become nearly impossible to own when the median home price has gone up to $1.3 million. The homeownership rate could, therefore, decline unless more is done to increase housing supply.

Rising Rates, Inflation Pose Challenges

That is not the end of it. Mortgage rates are set to rise this year. The Federal Reserve has been in a quandary about which of two mandates it should focus on: full employment or manageable inflation. Four million fewer Americans are working compared to before the pandemic. The unemployment rate, though it’s back to normal levels, is a less important measure because those who are not searching for a job are not counted. So, the Fed should be accommodative to keep pushing the economy along. But the highest core inflation in 30 years is forcing the Fed to rethink its approach. Reducing the purchase of mortgage-backed securities and raising short-term interest rates are inevitable. The end result of these policy actions will be higher mortgage rates, around 3.7% by the end of this year. At that rate, a $375,000 loan will translate to a $1,726 monthly payment.

“A huge number of homeowners could be ‘mishoused’—living in the right property before the pandemic but not anymore.”

Those pondering when to become homeowners will face higher mortgage payments, putting them a step behind those who have already bought. People who purchased last year locked in an average fixed payment of $1,265, while their new next-door neighbor is paying much more. At least those new buyers, unlike renters, won’t face the prospect of annual hikes in their monthly payment.

Rents accelerated in the late months of 2021, with government data showing a 5% annualized gain. Private sector data of large apartment owners indicate an even faster rent growth. Rents will rise again this year and the following year, and on and on. That’s because housing shortages are plaguing the entire country. Aside from a few data anomalies associated with the pandemic-era eviction moratorium, current rental vacancy rates are essentially at a 40-year low. That’s on top of all-time low For Sale inventory.

The Fed’s inflation-fighting policies won’t contain rising costs immediately. Inflation will be with us throughout 2022. In addition to higher housing costs, meat prices have gone up by 12% as of November and gasoline prices by 50%. Perhaps, this is a hint to eat more veggies and fruits (which have risen in price by only 3%) and buy electric cars. Real estate professionals need to drive more than the general population and will not be happy about high energy prices.

Rising apartment rents have boosted multifamily property prices. This may be why more investors are buying single-family properties. Home purchases for reasons other than primary occupancy rose to 17% of all transactions in October. Moreover, some investors may have looked to the past to find that real estate is a very good hedge against inflation. In the 1970s, when inflation was high, consumer prices rose by 7.1% on average per year. Home prices outperformed consumer prices with an average 9.9% annual gain. In the 1980s, as the Fed jacked up interest rates in order to kill inflation, home sales plunged—but not home prices, because rents were rising. During that decade, consumer prices and home prices rose by 5.6% and 5.5%, respectively. In subsequent decades, it was the same story: Home price growth has roughly matched or slightly outperformed consumer price inflation.

The combined impact of investor purchases and repeat buyer transactions will buoy home sales in 2022, even with rising mortgage rates. Existing-home sales are expected to fall by only 2% after a nice 14% cumulative growth in the past two years. Home prices will not fall and, in fact, will rise by 4% nationally.

Commercial Rebound: What Happens to Offices?

Rising rents are also happening in commercial real estate. The industrial and warehouse sectors have been strong throughout the pandemic. Online shopping and shipping needs have boosted commercial demand, rents, property prices, and construction. The retail sector is also witnessing rent hikes, though that constitutes a recovery after measurable declines at the onset of the pandemic. Retail sales at brick-and-mortar shops have increased meaningfully from a year ago—by 14% at home furnishing stores, 16% at general merchandising stores, 26% at clothing shops, and 29% at food and beverage establishments, driven by growth in the suburbs and not in downtowns.

The one commercial sector with a huge question mark is the office market. City skylines are beautifully laid out and symbolize strength and glamour—but the buildings sit mostly empty. Only around one-third to, at best, half of office buildings are being utilized, depending on the city. Office rents are mostly being paid, even if the spaces aren’t being used, because many companies are financially healthy. Nonetheless, there has been a slow, steady upward creep in office vacancy rates and a downward trend in lease rates.

It is unclear if the office market can truly bounce back to pre-pandemic conditions, even when the pandemic is officially over. Office workers have demonstrated the ability to work from home. It remains to be seen whether hybrid offices will precipitate a comeback in the office sector. Rent concessions will likely continue. Repurposing office space is also a possibility, though it may require tax incentives or extra government funding.

Remote Work Opens Housing Options

Only time will tell, but right now, we’re in the first inning of fully digesting the meaning of work-from-home flexibility. That means a huge number of homeowners could be “mishoused”—living in the right property before the pandemic but not anymore.

Now to Hawaii: It has the worst job performance among all 50 states, with state employment 12% below pre-pandemic levels. Travel—both domestic and, especially, international—is just not there. Local workers are hurting. Yet, Hawaii home prices are among the highest and fastest-rising in the country. Working from home can mean working from a vacation spot. How would the boss know, and why would the boss care? Home sales in vacation resort regions like Hawaii have been exceptionally strong throughout the pandemic. All the while, homeownership in Hawaii has fallen from 61% before the pandemic to 56.6% now. It’s one illustration of the best and the worst of times in the current age.

©National Association of REALTORS®
Reprinted with permission