This week’s news from the housing and mortgage markets was mostly dismal, with a 22-year low in mortgage application activity, a sixth straight month of existing home sales declines and a growing pessimism among builders.
On The Mortgage Front
Freddie Mac (OTCMKTS:FMCC) reported the 30-year fixed-rate mortgage averaged 5.13% as of Aug. 18, down from last week when it averaged 5.22%. The 15-year fixed-rate mortgage averaged 4.55%, down from last week when it averaged 4.59%. And the 5-year Treasury-indexed hybrid adjustable-rate mortgage averaged 4.39%, down from last week when it averaged 4.43%.
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“Inflation appears to be beyond its peak, which has stopped the rapid increase in mortgage rates that the housing market was experiencing earlier this year,” said Sam Khater, Freddie Mac’s chief economist. “The market continues to absorb the cumulative impact of the large price and rate increases that led to a plunge in affordability. As a result, over the rest of the year purchase demand likely will continue to drag, supply will modestly increase, and home price growth will decelerate.”
The purchase demand drag that Khater predicted was evident in the Mortgage Bankers Association’s (MBA) Market Composite Index, which dropped by 2.3% for the week ending Aug. 12 from one week earlier. The seasonally adjusted Purchase Index dipped by 1% and the unadjusted Purchase Index was down by 2% – the latter was also 18% lower than the same week one year ago.
The unadjusted Refinance Index was 5% lower from the previous week – the lowest level since November 2020 – and was 82% below the level recorded in the same week one year ago. The refinance share of mortgage activity shrank to 31.2% of total applications from 32% in the previous week.
“Mortgage application activity was lower last week, with overall applications declining over two percent to their lowest level since 2000,” said Joel Kan, MBA associate vice president of economic and industry forecasting. “Home purchase applications continued to be held down by rapidly drying up demand, as high mortgage rates, challenging affordability and a gloomier outlook of the economy kept buyers on the sidelines.”
On The Homebuying Front
Existing home sales declined for the sixth consecutive month in July, according to the National Association of Realtors (NAR), down 5.9% from June to a seasonally adjusted annual rate of 4.81 million in July. Year-over-year, sales fell 20.2% from the 6.03 million recorded in July 2021.
The median existing-home price for all housing types in July was $403,800, up 10.8% from $364,600 one year ago, with prices rising in all regions. This marked the 125th consecutive months of year-over-year increases, the longest-running streak on record.
Also rising was the total housing inventory, up to 1.31 million units by the end of July, a 4.8% spike from June and unchanged from the previous year. Unsold inventory sits at a 3.3-month supply at the current sales pace, up from 2.9 months in June and 2.6 months in July 2021.
“The ongoing sales decline reflects the impact of the mortgage rate peak of 6% in early June,” said NAR Chief Economist Lawrence Yun. “Home sales may soon stabilize since mortgage rates have fallen to near 5%, thereby giving an additional boost of purchasing power to home buyers.”
“We’re witnessing a housing recession in terms of declining home sales and home building,” Yun added. “However, it’s not a recession in home prices. Inventory remains tight and prices continue to rise nationally with nearly 40% of homes still commanding the full list price.”
Separately, Zillow reported the first decline in home values after two years of accelerated growth – albeit a scant 0.1% dip (or $366) from June to July. The typical U.S. home value is now at $357,107.
"Home values flattening so quickly after recent record growth might surprise, but it's a badly needed rebalancing that gives home buyers more options, more time to shop and more negotiating power," said Zillow Chief Economist Skylar Olsen. "This slowdown is about discouraged buyers pulling back after the affordability shock from higher rates. As prices soften, many will renew their interest, and we will continue our progress back to 'normal.' With buyers ready in the wings once confidence returns, homeowners can expect to keep the majority of the equity gains they've seen in the last two years."
However, the nation's typical home value was also up 16% year-over-year in July and was up by 44.5% from July 2019.
As for the markets recording vibrant sales activity, Realtor.com – which is operated by News Corp (NASDAQ:NWS) (NASDAQ:NWSA) subsidiary Move, Inc. – reported that New England localities occupied half of its top 10 list on the eighth annual Realtor.com Hottest ZIP Codes Report.
According to Realtor.com, these homes sold in just over a week (8 days) and received nearly four times (3.7) more buyer views than a typical U.S. listing. The 2022 Hottest ZIP Codes in America, in rank order, are:
14618 Brighton, New York
03062 Nashua, New Hampshire
43085 Worthington, Ohio
03038 Derry, New Hampshire
04062 Windham, Maine
18017 Bethlehem, Pennsylvania
37604 Johnson City, Tennessee
03106 Hooksett, New Hampshire
02760 North Attleboro, Massachusetts
04210 Auburn, Maine
“With rising inflation and mortgage rates squeezing monthly housing budgets, this year's determined buyers are breathing new life into competition for homes in historic areas like New England,” said Danielle Hale, chief economist for Realtor.com. “Our 2022 Hottest ZIPs ranking illustrates how many Americans are redefining their priorities to achieve homeownership while building their careers, by trading downtown life for relatively affordable areas with reasonable part-time commutes to big cities.”
Of course, not everyone acquires a residential property with the idea of setting up a new home. According to new data from Redfin (NASDAQ:RDFN), real estate investors purchased 87,500 U.S. homes in the second quarter, up 11% from the first quarter and up 5.9% from one year ago. While the second quarter activity is below the all-time high of 93,700 in the third quarter of 2021 – the apex of the pandemic-driven homebuying rush – it is still higher than the pre-pandemic period.
In dollar terms, Redfin estimated that investors purchased a record $60.1 billion worth of real estate in the second quarter, up from $50.5 billion in the first quarter and $54.5 billion in the second quarter of 2021.
“Investor purchases probably won’t bounce back to 2021 levels, but they’ll likely remain more common than before the pandemic because the housing market is stable compared with today’s volatile stock market,” said Redfin Senior Economist Sheharyar Bokhari. “Those who buy properties as rentals will still cash in, with high demand and vacancies near record lows. But investors will be less of a roadblock for regular buyers as the housing-market slowdown reduces competition. Investors and individual buyers who can afford to purchase homes have a leg up because other prospective buyers have been priced out.”
On The Home Building Front
In terms of housing market supply and demand, the deficit on the supply side is still creating problems.
New data released earlier this week by the U.S. Census Bureau and the Department of Housing and Urban Development determined single‐family housing starts in July were at a rate of 916,000, which is 10.1% below the revised June figure of 1,019,000. Single‐family housing completions in July were at a rate of 1,009,000, down 0.8% from June’s revised rate of 1,017,000, and single‐family authorizations in July were at a rate of 928,000, which was 4.3% percent below the revised June figure of 970,000.
Not surprisingly, builder confidence plummeted for the eighth straight month in August. The National Association of Home Builders (NAHB)/Wells Fargo (NYSE:WFC) Housing Market Index fell six points this month to 49, marking the first time since May 2020 that the index fell below the key break-even measure of 50.
Roughly one-in-five (19%) home builders in the index survey reported reducing prices in the past month to increase sales or limit cancellations – the median price reduction was 5% for those reporting using such incentives. And 69% of builders reported higher interest rates as the reason behind falling housing demand, the top impact cited in the survey. The NAHB is forecasting the total volume of single-family starts will post a decline in 2022, the first decrease since 2011.
“Ongoing growth in construction costs and high mortgage rates continue to weaken market sentiment for single-family home builders,” said NAHB Chairman Jerry Konter, a home builder and developer from Savannah, Georgia. “And in a troubling sign that consumers are now sitting on the sidelines due to higher housing costs, the August buyer traffic number in our builder survey was 32, the lowest level since April 2014 with the exception of the spring of 2020 when the pandemic first hit.”
