Housing Today Comes Down to These 4 Things | Guest Post

No doubt the Federal Reserve has had a tough job these last few years; everyone agrees their actions have greatly impacted the economy at large and more personally the housing market, which due to its dependence on interest rates was the first industry to go into a recession.

Now, there is chatter we are close to the end of the Fed rate hike cycle and a number of predictions and assumptions are being made about whether rate hikes will continue or pause, and for how long.

Why is this so important? Because the Fed's drive to slow the economy thereby slowing down inflation comes at a price. The price is fear, instability and job loss. Which in turn creates volatility as markets react to economic reports without the stabilization of a Federal Reserve buying mortgage-backed securities and treasuries.

Housing is long-term, typically. I will concede there are flippers and short-term investors, but, for most, housing is long-term. The most recent median homeownership rate is 13.2 years, that’s an increase of 3 years over the last decade. Thirteen years seems pretty long-term… and investors are more secure about the economy long-term.

I want to break housing down into four buckets this month: supply, demand, affordability and credit availability. The housing sector is strong, well-funded and able to withstand short-term volatility. While critics continue to generate fear around instability, crisis, bubbles, foreclosures and more, our job as real estate professionals is simply to support reality with facts.

First, Supply. Redfin just released a report showing 38 percent of all homes are owned free and clear and, for those who have a mortgage, 24 percent have a rate locked below 3 percent, 41 percent are locked in between 3 percent and 4 percent and another 21 percent are locked in between 4 percent and 5 percent. That means 86 percent of all homes nationally have a rate below 5 percent. In Colorado, a few more homes have a mortgage at 71 percent but a whopping 92 percent of them are locked with a rate below 5 percent; second only to Utah in the strength of our equity position. Supply is locked in. It doesn’t need to go anywhere nor expose itself. Homeowners have never been stronger.

DMAR’s new listings dropped again more than just seasonally. New listings dropped to 3,837 new homes to choose from during the month of October, dropping 27 percent from September and 28 percent year-over-year, hitting all price points almost equally. Year-to-date, new listings have been dropping for the last three years, as Denverites built up a swell of equity locked into historically low interest rates.

Active listings will catch some headlines as it’s 116 percent higher than last year; but that’s due to an overheated housing market last fall when rates were still low and buyers could not satiate themselves. Inventory is still 15 percent lower than it was in 2019. This will keep home prices overall stable.

Demand. Both pending home sales and closed are down. Pending sales were down 4 percent month-over-month and 39 percent year-over-year. Closed saw an even more dramatic month-over-month, dropping 25 percent. Mortgage purchase application data is below 2008 levels today as buyers in October alone dropped off just shy of 20 percent. Year –to date, mortgage purchase applications are down 42 percent. These numbers should not be a surprise given the rise in interest rates. The 30-year fixed rate ended October at 7.125 percent according to Mortgage News Daily, an increase from 3.125 percent just one year ago.

Buyer demand will pick up as either interest rates settle back down into the 5’s and 6’s or, eventually, we simply get used to higher rates.

Affordability. Homeowners took advantage of low interest rates improving their household finances and increasing affordability. In fact, the number of families taking advantage of restructuring their loan doubled from 7.1 million refinance applications in 2018 to 15 million in 2020. Considering there are only 133,000 U.S. homeowners who can save money by refinancing today; it really highlights how many already did so. Their affordability is locked-in for 30 years. The deterioration is coming for first-time home buyers. We will continue to see programs released from FHFA and HUD to help offset this first-time home buyer affordability problem.

Credit Availability. This is the crux of my stability argument. Not only do we have a wealth of equity (over $29 trillion), locked in low interest rates (85 percent below 5 percent), and continued rise of wages (to the dismay of the Fed), we have the strongest homeownership profile in history.

Household debt service payments as a percentage of disposable personal income is close to an all-time low. Mortgage debt specifically, given the recent refinance boom, created an increased cash flow and stability for homeowners. The average credit score today, as reported by Experian, is a record high of 714. Fannie Mae reported the average first-time homebuyers credit score is 746. Homebuyers, post-2008, have had rigid employment, income, assets, and credit requirements, with credit availability at the tightest levels we have seen in 20 years.

The housing market came to a halt the second half of 2022. With its continued slowdown evident in all of October’s numbers, many are put on edge as to what will happen next. The Fed will raise the fed rate today in hopes of putting the breaks on our economy and increase job loss; which regretfully seems to be the only way to keep Americans from spending. Through all of this, however, housing is good. Homeowners are strong. They simply need to not sell. When rates do ease, as they historically do during recessions, the fact that the largest age group today is 31 years old- and first-time home buyers were left behind for the last two years, we will see buyer demand return.

Until next time, this is Nicole Rueth with the Rueth Team, powered by OneTrust Home Loans. It’s my pleasure to keep you updated.

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