February 11, 2019
After ending 2018 in a serious slump, demand for housing is suddenly soaring again, thanks to a drop in mortgage rates that could be temporary.
The average rate on the 30-year fixed mortgage rose throughout much of 2018, hitting a recent peak in November. Rates had been much lower throughout 2016 and 2017, which helped produce the run-up in home prices.
When rates began rising again last year, the combination of high prices and higher rates took its toll on sales, which fell sharply in the second half of last year to the lowest level in several years.
But mortgage rates began to slide again in November, falling back even more dramatically in December, when the stock market sold off and the government was on the verge of what would become the longest shutdown ever. That drop in rates is now suddenly registering with buyers and reinvigorating housing demand.
Affordability is still an obstacle
The trouble is that while there are more houses coming on the market, and prices are easing slightly, there are still not enough affordable homes for sale. Supply is increasing largely because homes are sitting on the market longer.
"It's important to remember that we're coming off of four straight years of inventory declines that pushed the market to a record low availability of homes for sale," said Danielle Hale, chief economist of Realtor.com. "The real metric to keep an eye on is entry-level homes, which are the key to getting today's market back in balance. These homes are still in short supply."
That is in part because of soaring demand from millennials and because after the housing crash, millions of entry-level homes were purchased by investors and turned into single-family rentals, removing them from the overall housing stock.
Homebuilders are not even close to making up for the shortfall. The homes that they are building are largely in the move-up and luxury sectors. But even they saw a jump in demand to start the year.
"Builders in Florida have reported stronger sales in January and are attributing it to the lower mortgage rates," said Lesley Deutch of California-based John Burns Real Estate Consulting. "Most builders have been surprised at how sensitive the demand is to small changes in the mortgage rate."
If rates rise again, buyers will likely pull back. So many of them are on the margins to begin with, given today's high prices. Even small moves price buyers out. More homes are likely to come on the market in the spring, as they usually do, but sellers have less and less incentive if rates rise as well. They would be paying a higher rate to move.
Weekly Mortgage Applications Fall Despite Drop in Rates
Mortgage demand continued to weaken, with homebuyers retreating the most last week.
Overall mortgage application volume fell 2.5 percent last week compared with the previous week, according to the Mortgage Bankers Association's seasonally adjusted index. Volume was nearly 10 percent lower than a year ago.
Purchase volume pulled back the most, with those applications falling 5 percent for the week and 2 percent annually. The signals are mixed, as real estate agents are reporting a surge in potential buyer activity through open houses in the past few weeks. Home sales fell at the end of the year, but so did mortgage rates, and agents report seeing higher demand in direct response to lower rates.
"I absolutely think it's the interest rate, especially when they're getting a 30-year mortgage and they're going to be stuck with it for a long time," said Laura Barnett, a Dallas area real estate agent who was surprised by the crowd of house hunters who came to one of her open houses last Sunday. "They have to make a really wise decision. They can always refinance later if it goes down, but they can never get this rate again if it goes back up."
"Despite more favorable borrowing costs, and after a three-week surge in activity, purchase applications have slowed over the past two weeks, and are now almost 2 percent lower than a year ago," said Joel Kan, an MBA economist. "However, moderating price gains and the strong job market, including evidence of faster wage growth, should help purchase growth going forward."
Applications to refinance a home loan, which are far more rate-sensitive week to week, increased 0.3 from the previous week but were still 19 percent lower than a year ago. Many borrowers already refinanced to rates in the 3 percent range a few years ago, so there is not a lot of incentive now to go through the process. For those who want to take cash out, they are now more likely to take out a second loan or line of credit rather than give up their current rock-bottom rate.
Mortgage rates started this week slightly higher, but then stabilized. There is no major economic data expected later this week to cause more volatility, but there is always the potential for political issues at home and abroad to cause major moves in the bond market.