🎉Grateful for Improved Rates, Will This Trend Continue?🎉

LET'S REVISIT THE EVENTS OF LAST WEEK

November 20, 2023
 

Interest rates are finally on a downward trend, offering relief to homebuyers and boosting confidence among sellers. To stay informed, let's review the latest developments.

The October Consumer Price Index (CPI) revealed unchanged inflation from September, falling below the anticipated 0.1% increase. Annually, CPI dropped from 3.7% to 3.2%, reaching a two-year low. Core CPI, excluding food and energy, increased by 0.2% monthly, while the annual rate decreased from 4.1% to 4.0%, also hitting a two-year low. These reports suggest a decline in inflation.

Contributing factors to this stabilization included lower gasoline and used car prices, along with more moderate shelter costs (rent). However, there were increases in motor vehicle and health insurance expenses, with health insurance costs rising by over 246% since 2000.

The significant takeaway is that inflation has notably decreased from its peak last year, with the headline rate at 3.2% (down from 9.1%) and the core rate at 4% (down from 6.6%). The Federal Reserve's interest rate hikes, implemented to slow the economy and control inflation, have played a role. Since March of the previous year, the Fed has increased the benchmark Fed Funds Rate eleven times, reaching a 22-year high. No rate hikes were made in September and November, with the next meeting on December 13 anticipated for further insights. There is a belief that there is a 0% chance of another rate hike this year.

In wholesale inflation, measured by the Producer Price Index (PPI), October saw a significant reduction with a 0.5% decrease, the most substantial since April 2020. The annual PPI rate dropped from 2.2% to 1.3%, while the Core PPI (excluding food and energy) remained flat for the month, and the annual rate decreased from 2.7% to 2.4%. These figures were all below prior estimates. The Producer Price Index (PPI) tracks the average change over time in selling prices received by domestic producers for their output, indicating the cost of goods and services bought and sold by manufacturers and other producers.

The bottom line of the latest PPI report is encouraging, showcasing a significant easing of inflation. October's annual PPI of 1.3% is a drastic reduction from the previous year's 11.7% peak, potentially indicating ongoing improvements in inflation rates.

Inflation improvements equate to mortgage rate improvements.

Monthly principal and interest payments on a $600,000 mortgage:

At 2.65% = $2,418 (January '21)

At 3.2% = $2,595 (January '22)

At 7.37% = $4,142 (October '22, 2022's peak)

At 5.99% = $3,593 (February '23, 2023's low)

At 8.03% = $4,415 (October '23, 2022's peak)

At 7.37% = $4,142 (Current)

(Data sourced from X, @ResiClub)

Affordability has long been a concern. If rates were as low as 2.65%, it would further deplete inventory, leading buyers to offer well above asking prices. While rates are expected to improve, price stability is crucial. Homeownership remains significant for many families as a primary or sole means of wealth accumulation. It's essential to approach the homebuying process realistically, understanding that even with lower rates, it won't necessarily become easier. However, the long-term benefits make it worthwhile.

After three months of worsening rates, we observed reduced activity and more concessions. The anticipation of Fed rate cuts as early as May 2024 is on the horizon. The bond market and mortgage rates are likely to respond positively to favorable inflation reports and any labor market weaknesses leading up to that point. For those feeling discouraged about buying, holding on may prove rewarding in 5-7 years.

While this week is relatively slow in terms of news, key reports are expected ahead of the Thanksgiving holiday. Tuesday will bring updates on Existing Home Sales for October and the minutes from the Fed’s November 1 meeting. Keep an eye out for the latest Jobless Claims on Wednesday.

DECIPHERING THE HEADLINES

CLASS ACTION LAWSUITS/NAR

"Keep calm and keep serving consumers," emphasized Richard Gibbens, executive director of Southwest MLS. Transparency and disclosure in real estate are paramount, and buyers deserve effective representation. Educating buyers about an agent's responsibilities and the intricacies that lead to favorable deals is crucial.

The mortgage industry has experienced hardships and significant changes since the great financial crisis, leading to new regulations. While change can be challenging, regulations foster accountability and provide homebuyers with clearer expectations regarding purchase costs.

MORTGAGE DEMAND

As of October 26, 2023, mortgage applications have declined by 50% since the beginning of the year, reaching their lowest point since 1994. Negative headlines create undue market reactions, eroding confidence and prompting people to step back. After three months of worsening rates, demand understandably dwindled. However, since the peak in October, rates have been trending downward, and mortgage applications have seen a two-week consecutive increase. This trend is expected to continue as inflation improves. It's essential to remember that news is often a day late, and market conditions can change rapidly. Successful buyers seize opportunities despite the news cycle, recognizing that timing is crucial.

HOME PRICES & SELLER CONCESSIONS

The recent easing of the supply crunch in the housing market has provided buyers with more options. In October, new listings were comparable to September, marking the highest in six months when seasonally adjusted. Although these listings were down 4.5% from the previous year, it was the smallest decline since summer 2022. Active listings, representing the total number of homes for sale, rose by 1.4% from the previous month, reaching the highest level since May, albeit still 12.5% lower than last year.

To attract buyers, sellers are adjusting prices and offering concessions. Approximately 20.8% of homes sold in October experienced a price drop, close to the record high of 21.6% from a year earlier. Additionally, over one-third of sellers are providing concessions, such as assistance with repairs, closing costs, or mortgage-rate buydowns.

Despite high costs, people continue to move due to major life events like divorce or new job opportunities. Many prospective buyers, waiting for mortgage rates and prices to fall, are re-entering the market. Others are motivated by the desire to relocate to more affordable areas.

At the end of October, a slight decrease in mortgage rates likely contributed to an increase in pending sales as buyers aimed to secure lower borrowing costs. With rates continuing to fall this month, there's an expectation of a more significant rise in pending sales in November.

MORTGAGE RATES

WE NOW HAVE A 0% CHANCE OF ANOTHER RATE HIKE IN 2023

THERE IS ALSO A 0% CHANCE OF A RATE CUT IN 2023

ODDS OF A RATE CUT IN MARCH 2024: 35%

ODDS OS A RATE CUT IN MAY 2024: 69%

ODDS OF A RATE CUT IN JUNE 2024: 89%

Following the last Fed meeting and CPI report, the market recalibrated its expectations due to Jerome Powell's less hawkish tone. Concrete data showing the effects of the rate hike slowing down the economy suggests that hikes are now unlikely.

INVENTORY

In November, the National Association of Home Builders (NAHB) Housing Market Index, which gauges builder sentiment, dropped six points to 34, continuing its below-50 trend, a level considered breakeven. This decline marks the fourth consecutive monthly drop, with a total decrease of 22 points since July, reaching its lowest since last December. The index components all experienced declines: current sales conditions fell six points to 40, expectations for future sales dropped five points to 39, and buyer traffic reduced by five points to 21.

The key reason behind this decreasing confidence among builders is the high mortgage rates. However, NAHB Chief Economist Robert Dietz suggests that recent macroeconomic data indicate potentially improving conditions for home construction in the near future. In a positive turn for buyers, a higher percentage of builders (36%) have reported price cuts, the highest in a year.

Regarding housing starts, which measure the beginning of construction on homes, there was an unexpected increase in October, rising 1.9% from September. This rise was mainly in multi-family units, although there was a slight 0.2% increase in single-family home starts. Building permits, a sign of future supply, also saw an increase in October after a drop in September, with permits for single-family homes hitting a year-high.

NAHB Chair Alicia Huey notes that the scarcity of existing home inventory supported new construction demand in October, despite higher interest rates. Yet, the current increase in housing starts is still insufficient to meet the existing demand. The annualized pace of completed homes coming to the market is around 1.41 million, but after accounting for the approximately 100,000 homes that need replacement due to aging, the supply falls short of the demand trend, which is at 2 million household formations. Even future supply indications, like building permits at 1.49 million annualized, are still below the necessary levels.

The conclusion is that the ongoing imbalance of higher demand than supply will likely continue to support home values, particularly as we approach the spring homebuying season next year.

THE BID OVER ASK TOOL

We have a great tool that can help you when consulting buyers. In some cases, its still inevitable, you have to bid over the ask price. Often, we don’t educate buyers on what the difference in the market value and list price is. Buyers can see exactly how a bid over ask can not only win the deal, but also the future benefit of the purchase based on the average appreciation in the area. To use this tool, schedule a time on my calendar. See below!

INSIGHT FROM MARK ZANDI

The economy is significantly less sensitive to interest rates than in the past. The following tweet thread outlines the reasons behind this shift, and it's a key factor in preventing a recession despite the Federal Reserve's assertive rate hikes.

One major contributor to the economy's reduced sensitivity to rates is that households have effectively secured historically low rates. Only 10% of household debts have rates that adjust within one year of a change in market rates, a considerable decline from 35% in the early 1980s.

Despite the higher rates, both stock and house prices remain resilient. The stock market benefits from the excitement surrounding AI, while the housing market is influenced by a prolonged shortage of affordable housing and the fact that homeowners have mortgages with exceptionally low rates.

— Mark Zandi

WHAT PRICE MAKES SENSE?

Buying a home is a deeply personal process, often shared with friends and family who contribute valuable feedback to the excitement. However, it's crucial to be cautious about excessive advice, as there's no one-size-fits-all solution in real estate.

The initial step in the home-buying process involves getting approved for a mortgage. It may surprise you to discover that you're approved for more than you initially thought. Mortgage approvals are based on gross income, but daily living relies on net income. To create a plan that suits your needs, we carefully review your budget, net income, credit, and debt.

Obtaining pre-approval for a home loan before embarking on your home search holds several key advantages:

Budget Clarity: Pre-approval provides a clear understanding of your affordability, enabling you to focus your search on homes within your budget. This sets parameters with your realtor accordingly.

Seller Confidence: Sellers are more likely to take your offer seriously with a pre-approval, showcasing financial readiness and reliability. In many markets, it is a requirement for showing a home.

Speed: Pre-approval accelerates the buying process as a substantial portion of the financial paperwork is already in place. We pre-underwrite, positioning you for non-contingent offers, with closing times ranging between 10-20 days depending on the loan program.

Negotiation Leverage: Armed with pre-approval, you gain a stronger position in negotiations. Sellers often prefer dealing with buyers who have secured financing.

Reduced Risk of Disappointment: Knowing your loan amount in advance prevents the disappointment of falling for a home that exceeds your price range.

Prepare for the process and secure your approval today!