Mortgage Rates Trend Down But Affordable Homeownership Remains Elusive

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On the Mortgage Front

Freddie Mac (OTCMKTS:FMCC) announced the 30-year fixed-rate mortgage averaged 6.27% as of Dec. 22, down from last week when it averaged 6.31%. The 15-year fixed-rate mortgage averaged 5.69%, up from last week when it averaged 5.54%.

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“Heading into the holidays, mortgage rates continued to move down,” said Freddie Mac Chief Economist Sam Khater. “Rates have declined significantly over the past six weeks, which is helpful for potential homebuyers, but new data indicates homeowners are hesitant to list their homes. Many of those homeowners are carefully weighing their options as more than two-thirds of current homeowners have a fixed mortgage rate of below four percent.”

The Mortgage Bankers Association (MBA) reported that its Market Composite Index inched up by 0.9% on a seasonally adjusted basis from. The seasonally adjusted Purchase Index dipped by 0.1% and the Refinance Index saw a 6% rise.

Mike Fratantoni, MBA’s Senior Vice President and Chief Economist, noted, “Refinance application volume increased slightly in response but was still about 85% below year-ago levels. This is a particularly slow time of year for homebuying, so it is not surprising that purchase applications did not move much in response to lower mortgage rates.”

Fratantoni added, “The latest data on the housing market show that homebuilders are pulling back the pace of new construction in response to low levels of traffic, and we expect this weakness in demand will persist in 2023, as the U.S. is likely to enter a recession.

However, if mortgage rates continue to trend down, as we are forecasting, more buyers are likely to return to the market later in the year, as affordability improves with both lower rates and slower home-price growth.”

On the Homeownership Front

Fratantoni’s reference to construction was based on the announcement earlier this week that the Housing Market Index published by the National Association of Home Builders (NAHB) and Wells Fargo (NYSE:WFC) posted the 12th straight monthly decline in December to the lowest confidence reading since mid-2012, with the exception of the onset of the pandemic in the spring of 2020.

“In this high inflation, high mortgage rate environment, builders are struggling to keep housing affordable for home buyers,” said NAHB Chairman Jerry Konter, a home builder and developer from Savannah, Georgia. “Our latest survey shows 62% of builders are using incentives to bolster sales, including providing mortgage rate buy-downs, paying points for buyers and offering price reductions.

But with construction costs up more than 30% since inflation began to take off at the beginning of the year, there is little room for builders to cut prices. Only 35% of builders reduced homes prices in December, edging down from 36% in November. The average price reduction was 8%, up from 5% or 6% earlier in the year.”

Builders might not be the only stakeholders with fraying confidence in the housing market. The National Association of Realtors (NAR) reported existing home sales declined for the tenth month in a row in November – the total sales waned by 7.7% from October to a seasonally adjusted annual rate of 4.09 million in November. Sales were also down year-over-year, dropping 35.4% from 6.33 million in November 2021.

“In essence, the residential real estate market was frozen in November, resembling the sales activity seen during the Covid-19 economic lockdowns in 2020,” said NAR Chief Economist Lawrence Yun. “The principal factor was the rapid increase in mortgage rates, which hurt housing affordability and reduced incentives for homeowners to list their homes. Plus, available housing inventory remains near historic lows.”

NAR noted the median existing home price for all housing types in November was $370,700, an increase of 3.5% from $358,200 one year earlier. This marked 129 consecutive months of year-over-year increases, the longest-running streak on record.

The rising median home price played a role in the continued absence of affordable homeownership opportunities across much of the country. ATTOM’s Q4 2022 U.S. Home Affordability Report determined median-priced single-family homes and condos are less affordable in the fourth quarter of 2022 compared to historical averages in 99% of counties across the nation with enough data to analyze – one year ago, that percentage was 68%.

The report also found that the portion of average wages nationwide required for typical major home-ownership expenses has risen to 32.3% in the fourth quarter. That figure is considered unaffordable by traditional lending standards and is up from 29.6% in the third quarter of this year and from 23.8% -- it is also the highest point recorded since 2007.

“Prospective homebuyers – especially first-time buyers – can’t seem to catch a break,” said Rick Sharga, executive vice president of market intelligence at ATTOM. “For the past two years home prices have appreciated in double digits – 15% to 20% a year in some markets. Now that home prices have plateaued and even declined in some markets, buyers are faced with mortgage rates that have doubled, making home purchases even less affordable.”

Separately, RE/MAX (NYSE:RMAX) reported home sales in November were down 12% from the previous month in the 53 metro areas that the company tracks, with a median sales price of $394,000 – down 1.3% from October but 3.7% higher than November 2021. New listings dropped 21.4% from October to their lowest point of the year while the average close-to-list price ratio in November was 98% – thus, homes sold, on average, for 2% less than the asking price, compared to the 101% ratio from one year ago.

"We've been seeing a return to a more balanced market, where not just sellers are in the driver's seat. Sellers and buyers are each able to negotiate, with neither having a built-in upper hand," said Nick Bailey, RE/MAX president and CEO.

"This is especially good news for long-suffering buyers, who are still dealing with affordability issues. Buyers welcome having more choice as there are more homes on the market, and they are taking longer to sell. More good news for buyers: prices are flattening and actually decreasing in some markets. Things may bounce around a bit longer, especially into the first half of 2023, but it seems like the market is shaking off the last vestiges of the 2021 overheating. Balance seems to be returning – as it usually does."