Wonder where home prices go next? Look at stock, not mortgage rates

for sale signs

There was a lot of speculation that home prices would collapse as mortgage rates rose, and the argument was particularly compelling after the 30-year fixed term jumped from about 3% to more than 7% in less than a year. This was an unprecedented move, even if The mortgage rates were still below those crazy double digits from the ’80s, and they’re certainly still historically low, at about 6/7%, but the doubling in less than 12 months is what you need to watch out for. The percentage isn’t fun either, but it’s not a shocking percentage to pay off – other than that, do higher mortgage rates mean lower home prices? If one variable goes up, the other must go down. vice versa. So if mortgage rates go up, house prices should go down, but here we are looking at new all-time highs for home prices while the 30-year steady averages are around 7%. Well, on the other hand, history reveals that they are not negatively related. In other words, they can go up together, or go down at the same time. And why, remember how mortgage rates are determined. Much of their direction depends on the health of the economy. Right now, the economy is strong, if not very strong, which is why the Fed started to tighten the screws and raise their own federal funds rate in the first place, and that was meant to calm the overheating housing market, which was going through an unprecedented experiment and seemed to be working. However, the Fed can only manipulate the demand side of things. By that I mean calming demand by making mortgage financing more affordable and they achieved that goal. There’s a lot less demand, whether it’s driven by unaffordability or less willingness to buy at this rate/rate mix, but the Fed can’t do anything about the supply piece, which is the other major part they can try to rein in inflation with monetary policy , but they can’t build more homes. Unfortunately, low inventory was a problem before the Fed intervened. So their attempt to tame the housing market may be in vain, at least in part, and that may also explain why, despite significantly higher mortgage rates, the value of a typical home in the US topped $350,000 for the first time ever in June. It rose 1.4% from May to June, its fourth consecutive monthly gain, putting the typical home at $350,213, nearly 1% higher than the price we saw last June, and just enough to beat Zillow’s value index. Old Home (ZHVI) The record was set last July It’s all about inventory, or lack thereof If we shift our attention away from mortgage rates and instead focus on available inventory the current state of the housing market starts to make more sense . There are almost no homes for sale, and you begin to explain why home prices are so high despite mortgage rates approaching 7%. The latest data on the inventory front comes from Redfin, which reported the lowest turnover rate. In at least a decade, this is defined as the number of homes listed divided by the total number of salable properties found in a given area, and includes all residential properties, including single-family homes, condos/townhouses, and 2 to 4 properties that have been listed. Only 14 in every 1,000 US homes traded during the first half of 2023, compared to 19 in every 1,000 during the same period in 2019. Choose from four years ago, and already meager earnings at the time, before it flipped The pandemic is the US housing market, and California appears to be hardest hit, with nearly six out of every 1,000 homes in San Jose sold this year. Similar low turnover rates can be found in nearby Oakland, as well as further south in San Diego. They add that the “pandemic homebuying boom has depleted supply, and it hasn’t been renewed as homeowners hang on to relatively low mortgage rates.” This is known as the mortgage rate lock effect, or golden handcuffs to some. Simply put, homeowners cannot (because of affordability) or are unwilling (because of rate variance) to part with their existing 2-3% mortgage. My current home is basically non-existent. And the only show in town comes through the homebuilders, who incidentally are enjoying this quirky dynamic right now. Last week, a profile of members of the National Association of Realtors 2023 revealed that the housing shortage was the biggest barrier to buying for their clients. a home. The NAR also noted that the housing stock fell to the lowest level on record since 1999. Home prices are defying gravity thanks to lower supply. Zillow said there were 28% fewer new listings in June versus last June. We’ll soon find out if the stock gets any worse. But, they added, it may be the “low water point for year-over-year comparisons in the new listings” because inventories fell last July. So we may not see many amazing headlines in terms of lower supply because it would be hard to get much lower, at least relative to the recent readings. Regardless, it’s clear that a lack of supply, well below the healthy levels of 4-5 months ago, is allowing house prices to defy gravity as interest rates. This differs dramatically from the boom years of the early 2000s, when there was an excess of supply. of homes (8-9 months), similar mortgage rates, and exotic financing. This also explains why home prices have not fallen, despite high mortgage rates and poor affordability, and why many projections are now gaining momentum for house prices, as CoreLogic expects an increase of 4.5% by May 2024, in other words, it doesn’t expect home prices to drop anytime soon due to higher mortgage rates. Instead, keep an eye on the inventory, if the inventory starts to go up, you can start to bring up the argument for falling home prices. Read more: Will mortgage rates drop in 2023?

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