Market Update 3/07/2023
The housing market continues to be in a state of flux, with economic news and regulatory changes having an impact on mortgage rates, home prices, and supply. As a potential homebuyer or seller, it’s essential to stay informed about these developments to make informed decisions. That is why I continue to write these weekly updates.
One of the most significant updates affecting the housing market is the rise in mortgage rates over the past month. This rise is due to higher bond yields stoked by inflation fears and recent changes in upfront fees for loans from Fannie Mae and Freddie Mac. As a result, individual rate increases can be as much as 0.125%.
Despite this, the U.S. service sector continues to grow steadily, adding to robust consumer spending and labor market data, suggesting that the economy is not likely to enter a recession soon. Thirteen service industries, including construction, retail, accommodation, and food services, reported growth in February. Economists predict that employment growth will continue across most sectors, with February’s job report due on March 10.
In the housing sector, pending home sales surged by 8% in January, following a sharp drop in mortgage interest rates at the start of the year. However, since then, rates have rebounded, and the gains in sales, which were still 24% lower than in January 2022, may be short-lived. Meanwhile, home prices continue to slow down. In December 2022, home prices were only 5.8% higher than in December 2021, down from 7.7% year-over-year in November. Home prices are now 4.4% below their peak in June 2022. This type of dip happens seasonally though and in my opinion is not a sign of impending doom.
According to a 20-city index of larger markets, home price growth fell by 0.5% in December, the sixth consecutive monthly decline. The biggest year-over-year gainers were Miami, Tampa, and Atlanta, while San Francisco, Seattle, and Portland reported the lowest gains. San Francisco prices fell 4.2% between December 2021 and December 2022.
In regulatory news, the Federal Reserve’s closely followed core personal consumption expenditure index (PCE) rose 0.6% in January, indicating that the Fed may have more work to do to manage inflation. Core PCE adjusts for changing consumer habits, such as choosing lower-priced goods, and gives a more accurate picture of the cost of living.
Homeowners with low rates on existing mortgages may be disincentivized from buying another home at a higher rate, but 42% of homeowners hold no mortgage debt, also known as “free and clear.” They are less susceptible to higher rates and could hold the key to unlocking more supply and, in turn, more home sales. Additionally, those who refinanced during the pandemic boom have locked in purchasing power potentially for decades, with more than 40% of all current U.S. mortgages originating in 2020 or 2021 at all-time low rates.
In conclusion, the housing market is affected by several economic and regulatory factors, making it essential for buyers and sellers to stay informed. The rise in mortgage rates, slowing home price growth, and steady growth in the service sector are all critical factors to consider when entering the housing market. Homeowners who hold no mortgage debt may be more likely to sell, potentially unlocking more supply and driving more home sales. Until supply drastically increases or demand drastically decreases there is no buyer’s market in sight.