With ongoing high inflation pushing up everyday costs, some people are worried that’ll create a flood of foreclosures. Here’s why that’s unlikely.
Fewer people are seriously behind on mortgage payments right now. If foreclosures were going to rise a lot, more people would need to be late on their payments.
Since most are paying on time, a wave isn’t coming. If you’re concerned about a flood of foreclosures, the data shows that’s not likely.
In today’s housing market, there are two main affordability challenges impacting buyers: mortgage rates that are higher than they’ve been the past couple of years, and rising home prices caused by low inventory. To overcome those challenges, many people are working with their agents to find less expensive homes. And with newly built homes making up a historically large percentage of the total available inventory today, that search often includes brand new homes.
People Are Spending Less on Newly Built Homes
The graph below uses the latest information from the Census to show, in June, more of the newly built home sales in this country were in lower price ranges than in 2022:Last year, only 58% of newly built home sales were less than $500,000. This June, that number was up to 65%. This means more people are buying less expensive newly built homes right now while affordability remains a challenge.
Builders Are Offering Lower-Cost Options
Builders have picked up on this trend and are reacting accordingly. George Ratiu, Chief Economist at Keeping Current Matters, explains:
“Builders are also responding to this shift by bringing slightly smaller homes to market in an effort to meet lower price points . . .”
New data from the Census further confirms this pattern – it shows the median sales price of newly built homes has dipped down in recent months (see graph below):And as Mikaela Arroyo, Director of the New Home Trends Institute at John Burns Real Estate Consulting, says, the builders who are most responsive to this trend are forming pathways to homeownership:
“. . . it is creating opportunities for people to be able to afford an entry-level home in an area. . . . if you get that size down, that automatically will make it a more affordable home. The [builders] that are decreasing [size] the most are probably the ones that try to build more of an affordable product.”
How an Agent Can Help
Builders producing smaller, less expensive newly built homes give you more affordable options at a time when that’s really needed. If you’re hoping to buy a home soon, partner with a local real estate agent to find out what’s available in your area. An agent can help you look at newly built homes or ones under construction nearby.
Bottom Line
If you’re having a hard time finding a home you like in your budget, connect with a real estate professional. You need an agent who knows all about the latest inventory in your area, including homes still under construction or just built. That way you have an expert on your side who can provide information on builder reputations, builder contracts and negotiations, and more to help you with the homebuying process.
Want to know what experts say will happen in the rest of 2023? Home prices are already appreciating again in many areas. The average of the expert forecasts shows positive price growth.
Where mortgage rates go for the rest of the year will depend on inflation. Based on historical trends, rates are likely to ease as inflation continues to cool.
Even though low inventory continues to be a challenge, experts project 5 million homes will still sell this year. That pace should pick up if rates come down.
When you read about the housing market in the news, you might see something about a recent decision made by the Federal Reserve (the Fed). But how does this decision affect you and your plans to buy a home? Here’s what you need to know.
The Fedis trying hard to reduce inflation. And even though there’s been 12 straight months where inflation has cooled (see graph below), the most recent data shows it’s still higher than the Fed’s target of 2%:
While you may have been hoping the Fed would stop their hikes since they’re making progress on their goal of bringing down inflation, they don’t want to stop too soon, and risk inflation climbing back up as a result. Because of this, the Fed decided to increase the Federal Funds Rate again last week. As Jerome Powell, Chairman of theFed,says:
“We remain committed to bringing inflation back to our 2 percent goal and to keeping longer-term inflation expectations well anchored.”
Greg McBride, Senior VP, and Chief Financial Analyst at Bankrate, explains how high inflation and a strong economy play into the Fed’s recent decision:
“Inflation remains stubbornly high. The economy has been remarkably resilient, the labor market is still robust, but that may be contributing to the stubbornly high inflation. So, Fed has to pump the brakes a bit more.”
Even though a Federal Fund Rate hike by the Fed doesn’t directly dictate what happens with mortgage rates, it does have an impact. As a recent article from Fortunesays:
“The federal funds rate is an interest rate that banks charge other banks when they lend one another money . . . When inflation is running high, the Fed will increase rates to increase the cost of borrowing and slow down the economy. When it’s too low, they’ll lower rates to stimulate the economy and get things moving again.”
How All of This Affects You
In the simplest sense, when inflation is high, mortgage rates are also high. But, if the Fed succeeds in bringing down inflation, it could ultimately lead to lower mortgage rates, making it more affordable for you to buy a home.
This graph helps illustrate that point by showing that when inflation decreases, mortgage rates typically go down, too (see graph below):
As the data above shows, inflation (shown inthe blue trend line) is slowly coming down and, based on historical trends, mortgage rates (shown inthe green trend line) are likely to follow. McBride says this about the future of mortgage rates:
“With the backdrop of easing inflation pressures, we should see more consistent declines in mortgage rates as the year progresses, particularly if the economy and labor market slow noticeably.”
Bottom Line
What happens to mortgage rates depends on inflation. If inflation cools down, mortgage rates should go down too. Count on a real estate professional you can trust for expert advice on housing market changes and what they mean for you.
If you’re following mortgage rates because you know they impact your borrowing costs, you may be wondering what the future holds for them. Unfortunately, there’s no easy way to answer that question because mortgage rates are notoriously hard to forecast.
But, there’s one thing that’s historically a good indicator of what’ll happen with rates, and that’s the relationship between the 30-Year Mortgage Rate and the 10-Year Treasury Yield. Here’s a graph showing those two metrics since Freddie Mac started keeping mortgage rate records in 1972:
As the graph shows, historically, the average spread between the two over the last 50 years was 1.72 percentage points (also commonly referred to as 172 basis points). If you look at the trend line you can see when the Treasury Yield trends up, mortgage rates will usually respond. And, when the Yield drops, mortgage rates tend to follow. While they typically move in sync like this, the gap between the two has remained about 1.72 percentage points for quite some time. But, what’s crucial to notice is that spread is widening far beyond the norm lately (see graph below):
If you’re asking yourself: what’s pushing the spread beyond its typical average? It’s primarily because of uncertainty in the financial markets. Factors such as inflation, other economic drivers, and the policy and decisions from the Federal Reserve (The Fed) are all influencing mortgage rates and a widening spread.
Why Does This Matter for You?
This may feel overly technical and granular, but here’s why homebuyers like you should understand the spread. It means, based on the normal historical gap between the two, there’s room for mortgage rates to improve today.
And, experts think that’s what lies ahead as long as inflation continues to cool. As Odeta Kushi, Deputy Chief Economist at First American, explains:
“It’s reasonable to assume that the spread and, therefore, mortgage rates will retreat in the second half of the year if the Fed takes its foot off the monetary tightening pedal . . . However, it’s unlikely that the spread will return to its historical average of 170 basis points, as some risks are here to stay.”
“Though housing market watchers expect mortgage rates to remain elevated amid ongoing economic uncertainty and the Federal Reserve’s rate-hiking war on inflation, they believe rates peaked last fall and will decline—to some degree—later this year, barring any unforeseen surprises.”
Bottom Line
If you’re either a first-time home buyer or a current homeowner thinking of moving into a home that better fits your current needs, keep on top of what’s happening with mortgage rates and what experts think will happen in the coming months.
Before you decide to sell your house, it’s important to know what you can expect in the current housing market. One positive trend right now is homebuyers are adapting to today’s mortgage rates and getting used to them as the new normal.
To better understand what’s been happening with mortgage rates lately, the graph below shows the trend for the 30-year fixed mortgage rate from Freddie Mac since last October. As you can see, rates have been between 6% and 7% pretty consistently for the past nine months:
According to Lawrence Yun, Chief Economist at the National Association of Realtors (NAR), mortgage rates play a significant role in buyer demand and, by extension, home sales. Yun highlights the positive impact of stable rates:
“Mortgage rates heavily influence the direction of home sales. Relatively steady rates have led to several consecutive months of consistent home sales.”
As a seller, hearing that home sales are consistent right now is good news. It means buyers are out there and actively purchasing homes. Here’s a bit more context on how mortgage rates have impacted demand recently.
When mortgage rates surged dramatically last year, escalating from roughly 3% to 7%, many potential buyers felt a bit of sticker shock and decided to hold off on their plans to purchase a home. However, as time has passed, that initial shock has worn off. Buyers have grown more accustomed to current mortgage rates and have accepted that the record-low rates of the last few years are behind us. As Doug Duncan, SVP and Chief Economist at Fannie Mae, says:
“. . . consumers are adapting to the idea that higher mortgage rates will likely stick around for the foreseeable future.”
In fact, a recent survey by Freddie Mac reveals 18% of respondents say they’re likely to buy a home in the next six months. That means nearly one out of every five people surveyed plan to buy in the near future. And that goes to show buyers are planning to be active in the months ahead.
Of course, mortgage rates aren’t the sole factor affecting buyer demand. No matter where mortgage rates stand, people will always have reasons to move, whether it’s for job relocation, changing households, or any other personal motivation. As a seller, you can feel confident there is a market for your house today. And that demand is pretty strong as buyers settle into where rates are right now.
Bottom Line
The way buyers perceive today’s mortgage rates is shifting – they’re getting used to the new normal. Steady rates are contributing to strong buyer demand and consistent home sales. Connect with a local real estate agent to get your house on the market and in front of those buyers.
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