Housing Today Comes Down to These Things

As I sit down to write this month’s DMAR Market Trends Report, the FOMC is holding its seventh of eight annual meetings. No doubt the Federal Reserve has had a tough job these last few years; everyone agrees their actions have greatly impacted the economy at large and more personally the housing market, which due to its dependence on interest rates was the first industry to go into a recession.

Now, there is chatter we are close to the end of the Fed rate hike cycle and a number of predictions and assumptions are being made whether rate hikes will continue or pause, and for how long.

Why is this so important? Because the Fed’s drive to slow the economy thereby slowing down inflation comes at a price. The price is fear, instability, and job loss. Which in turn creates volatility as markets react to economic reports without the stabilization of a Federal Reserve buying mortgaged-backed securities and treasuries.  There is also evidence of this in the yields of short-term treasuries verses long term. The short term three-month and the two-year Treasury bills have yields higher than the longer 10-year note, creating a so-called inverted yield curve. When that happens, it highlights investors are more worried about the economy in the short-term than long-term.

Let’s double click on that… investors are more worried about the economy in the short-term than the long-term. Housing is long-term, typically. I will concede there are flippers and short-term investors, but, for most, housing is long-term. The most recent median homeownership rate is 13.2 years, that’s an increase of 3 years over the last decade. Thirteen years seems pretty long-term… and investors are more secure about the economy long-term.

I want to break housing down into four buckets this month: supply, demand, affordability, and credit availability. The housing sector is strong, well-funded and able to withstand short-term volatility. While critics continue to generate fear around instability, crisis, bubbles, foreclosures, and more, our job as real estate professionals is simply to support reality with facts.

First, Supply. Redfin just released a report showing 38% of all homes are owned free and clear and, for those who have a mortgage, 24% have a rate locked below 3%, 41% are locked in between 3% and 4%, and another 21% are locked in between 4% and 5%. That means 86% of all homes nationally have a rate below 5%. In Colorado, a few more homes have a mortgage at 71% but a whopping 92% of them are locked with a rate below 5%; second only to Utah in the strength of our equity position. Supply is locked in. It doesn’t need to go anywhere nor expose itself. Homeowners have never been stronger.

The security of a lower, fixed monthly payment in the face of short-term economic instability will continue to put pressure on new listings. Fewer new listings also puts pressure on demand as sellers most often buy in the same market. DMAR’s new listings dropped again more than just seasonally. New listings dropped to 3,837 new homes to choose from during the month of October, dropping 27% from September and 28% year-over-year, hitting all price points almost equally. Year –to date, new listings have been dropping for the last three years, as Denverites built up a swell of equity locked into historically low interest rates.

Active listings will catch some headlines as it’s 116% higher than last year; but that’s due to an overheated housing market last fall when rates were still low and buyers could not satiate themselves. Inventory is still 15% lower than it was in 2019. This will keep home prices overall stable. Short term there is some correcting of the overpriced 2020-2021 housing market; yet longer term trends show stability and as rates drop again, these low inventory levels will contribute to an upward pressure on homes prices.

Demand. Both pending home sales and closed are down. Pending sales were down 4% month-over-month and 39% year-over-year. Closed saw an even more dramatic month-over-month, dropping 25%. Mortgage purchase application data is below 2008 levels today as buyers in October alone dropped off just shy of 20%. Year –to date, mortgage purchase applications are down 42%. These numbers should not be a surprise given the rise in interest rates. The 30-year fixed rate ended October at 7.125% according to Mortgage News Daily, an increase from 3.125% just one year ago.

Buyer demand will pick up as either interest rates settle back down into the 5’s and 6’s or, eventually, we simply get used to higher rates. American’s love to consume and life events continue…. babies born, families downsize, kids graduate, all the things. They keep happening and will keep demand historically on track. Compared to 2020 and 2021, not so much though because sellers who are also buyers don’t need to move.

Affordability. Homeowners took advantage of low interest rates improving their household finances and increasing affordability. In fact, the number of families taking advantage of restructuring their loan doubled from 7.1 million refinance applications in 2018 to 15 million in 2020. Considering there are only 133,000 U.S. homeowners who can save money by refinancing today; it really highlights how many already did so. Their affordability is locked-in for 30 years. As housing reports from the likes of NAR, Freddie Mac, and Morgan Stanley highlight, affordability is deteriorating at a much faster pace than at any point in the last 30 years; I am reminded that homeowners are not seeing affordability deteriorate. The deterioration is coming for first-time home buyers.

We will continue to see programs released from FHFA and HUD to help offset this first-time home buyer affordability problem. It is a problem. NAR released a report earlier this year showing the average net worth of a homeowner is $300,000 while that of a renter was $8,000 in 2021.

Credit Availability.  This is the crux of my stability argument. Not only do we have a wealth of equity (over $29 trillion), locked in low interest rates (85% below 5%), and continued rise of wages (to the dismay of the Fed), we have the strongest homeownership profile in history.  Household debt service payments as a percentage of disposable personal income is close to an all-time low. Mortgage debt specifically, given the recent refinance boom, created an increased cash flow and stability for homeowners.  The average credit score today, as reported by Experian, is a record high of 714. Fannie Mae reported the average first-time homebuyers credit score is 746. Homebuyers, post 2008, have had rigid employment, income, assets, and credit requirements, with credit availability at the tightest levels we have seen in 20 years.

The housing market came to a halt the second half of 2022. With its continued slowdown evident in all of October’s numbers, many are put on edge as to what will happen next. The Fed will raise the fed rate today in hopes of putting the breaks on our economy and increase job loss; which regretfully seems to be the only way to keep American’s from spending. Through all of this, however, housing is good. Homeowners are strong. They simply need to not sell. Meanwhile, want-to-be homeowners are struggling with the higher prices and rates, but the longer they wait, the harder it will get. When rates do ease, as they historically do during recessions, the fact that the largest age group today is 31 years old- and first-time home buyers were left behind for the last two years, we will see buyer demand return. Whether you believe it will happen in 2023 or 2024 doesn’t matter, because ultimately housing is long-term.

Until next time, this is Nicole Rueth with the Rueth Team, powered by OneTrust Home Loans. It’s my pleasure to keep you updated.

Until next time, that’s a wrap for this month’s Market Trends update. It’s my pleasure to keep you updated,

It’s my pleasure to keep you updated.

Nicole Rueth
Producing Branch Manager with The Rueth Team of OneTrust Home Loans