main learning points
- Mortgage refinancing applications are down 88% from around this time last year, while new mortgage applications are down 46% over the same period.
- This is due to rapidly rising rates, which have made homes hundreds of dollars more expensive each month for the average buyer.
- The trend is likely to continue as the Fed plans more rate hikes in the coming months.
The demand for mortgages has decreased slightly in recent weeks because mortgage interest rates have fallen. Still, demand for refinancing has all but disappeared due to higher rates, with the current figure 88% lower than last year.
That’s not too bad for new mortgage applications, but they’re still 46% lower than last year.
Things have improved slightly in recent weeks, with mortgage applications rising 2.2% in the week ending Nov. 18 and 2.7% the year before. This is the first bright spot in a while, although demand has been falling for nine of the past 10 weeks.
Demand fell by 14.2% in early October.
So what’s really going on with the mortgage market and what does this mean for house prices in the near term?
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mortgage rates have skyrocketed
In an effort to curb rising inflation, the Fed is playing hard with the central bank’s base rate. There are now four consecutive increases of 0.75 percentage points, the fastest increase in the past 35 years.
It is clear that this rapid change has flowed through the mortgage.
The Fed base rate is the price at which all other debt in the economy is priced. Everything from mortgages to credit cards to personal loans to student loans is affected by the base rate, which is essentially the rate that banks pay themselves.
With base rates rising so quickly, mortgage payments have risen enormously over the past year. According to Freddie Mac, the current average rate for a 30-year mortgage is 6.58%. Last year, the same average was only 3.10% this time.
Over the past 12 months, the average mortgage interest has therefore more than doubled. This is a significant drain on the household budget.
In dollar terms, a $400,000 30-year mortgage at a rate of 6.58% would mean a monthly mortgage payment of $2,549. Change that interest rate to 3.10% and the monthly payment figure drops to $1,709.
That’s $840 more than what a homeowner should pay for the same property at a time when prices for everything are rising and layoffs are in many industries.
Mortgage demand has fallen sharply
With interest rates rising so sharply, it’s no surprise that demand for mortgages has plummeted. Existing homeowners who would consider an upgrade may feel trapped in their current home simply because moving would mean refinancing and a much more expensive mortgage.
This type of move is often discretionary. Most families can continue to live in their current home, even if they want to move to a different neighborhood or to a larger one. This means that demand is flexible depending on market conditions.
For first-time homebuyers, they may not have a choice. Even for those who have saved diligently for years, the latest hike in mortgage payments may mean putting their original plans on hold.
They are faced with a situation where the exact same house with the exact same mortgage is much more expensive now than it was a year ago.
Even if they were to go ahead with the purchase, it is likely that banks will be less willing to lend for affordability reasons.
Overall, it’s no surprise that we’ve seen demand fall off a cliff.
What does this mean for the housing market?
Well, it’s pretty simple math that if fewer mortgages are sold, fewer homes will be sold. And that’s exactly what happens.
Existing home sales have fallen sharply month over month since the start of 2022, with a 5.9% fall in October according to the National Association of Realtors. Apart from a short pause at the start of the pandemic, they are at their lowest level since 2011.
Despite a major slowdown in activity, prices are yet to pick up. Reduced inventory levels in the market have allowed values to remain firm for now, with a median existing home price of $379,100 in October. This is 6.6% more than a year ago, despite a 28.4% decline in the number of transactions over the same period.
Questions are being asked about how long this can go on. Demand is currently at a historically low level. Despite the upward trend of the past few weeks, it is more likely that the downward trend will not continue. Obviously it’s not guaranteed, but the Fed has made it clear that they’re not done raising rates just yet.
Given that rising interest rates have led to recessions, it stands to reason that continuing down this path will put more pressure on real estate.
As long as demand remains low, sellers will eventually have to lower their prices to get sales. While many homeowners can wait for prices to recover, others are forced to sell, or will be willing to take a discount to sell the home.
In short, the boom in the housing sector is unlikely to be seen again for quite some time, and it may get worse before it gets better.
What does this mean for potential starters?
In many ways, first-time buyers are most affected by these rate hikes. Existing homeowners may prefer to live in a bigger or better home, but the reality is that in most cases they can continue to live in their existing home.
The same cannot be said of those living in less secure housing. Those who live in rented accommodation are at the behest of their landlords, and even adults who live at home longer than planned are likely to put other areas of their lives on hold until they can’t afford to go out.
One of the only ways to really rectify the situation is to make more money or improve the amount you have available for the down payment. We can’t help with the former, but for starters we may be able to help increase the deposit.
If your buying time frame is less than 1-2 years, the truth is that you should stick to cash based investments like CDs. One of the positive side effects of rising interest rates is that interest rates have also gone up, although that is nothing to write about yet.
For those who have 3 years or more before planning to buy a home, investing may become an option to consider.
You want to manage the risk in your portfolio well, because the last thing you want is a lot of volatility in the nest egg that buys your house. We use the power of AI to help us select the best investments in our kits. A good example of a low-risk option is our Active Indexer Kit.
In this kit, our AI analyzes thousands of individual data points each week and then predicts the performance and volatility of large cap stocks, small cap stocks and technology stocks. Subsequently, these sectors and individual positions are automatically weighted based on predictions.
For investors who want even more safety nets, they can also add portfolio protection. It uses our AI to assess a portfolio’s sensitivity to different forms of risk, such as interest rate risk, general market risk, and oil risk. It then automatically applies advanced hedged strategies to offset them.
This is advanced stuff because for investors who have something as important as a home on the line, it’s important to have the best tools available to them.
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