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Mortgage rates rise for the fifth-straight week

Mortgage rates edged further toward 7%, rising for the fifth consecutive week, as the Federal Reserve suggests rate increases will continue amid stubborn inflation.

The 30-year fixed-rate mortgage averaged 6.73% in the week ending March 9, up from 6.65% the week before, according to data from Freddie Mac released Thursday. A year ago, the 30-year fixed-rate was 3.85%.

After hitting a 2022 high of 7.08% in November, rates had been trending down. However, they started climbing again in February, rising half a percentage point over the past month. Robust economic data continues to suggest the Federal Reserve is not done in its battle to cool the US economy and will likely continue hiking its benchmark lending rate.

“Mortgage rates continue their upward trajectory as the Federal Reserve signals a more aggressive stance on monetary policy,” said Sam Khater, Freddie Mac’s chief economist. “Overall, consumers are spending in sectors that are not interest rate-sensitive, such as travel and dining out. However, rate-sensitive sectors, such as housing, continue to be adversely affected. As a result, would-be homebuyers continue to face the compounding challenges of affordability and low inventory.”

The average mortgage rate is based on mortgage applications that Freddie Mac receives from thousands of lenders across the country. The survey includes only borrowers who put 20% down and have excellent credit.

Fed signals it will continue with rate hikes

Coming into 2023, inflation seemed to be cooling. But strong employment numbers and a rising Consumer Price Index revealed inflation remains stubbornly high.

In testimony to Congress on Tuesday, Federal Reserve Chairman Jerome Powell said the central bank will likely raise interest rates higher than previously forecast to fight inflation.

“While last month Fed officials said that a smaller increase in the federal funds rate would help create a soft landing for the economy, Powell’s testimony on Tuesday made it clear that the central bank is prepared to return to a faster pace of rate increases if the incoming February economic indicators remain strong,” said Jiayi Xu, an economist at Realtor.com.

This suggests that investors were not fully prepared and are anxious about the Fed’s upcoming actions, she said.

The Fed’s next rate-setting meeting is scheduled for March 21-22, where a half-point rate hike is now back on the table.

“Uncertainty about how high rates will go and how long they will remain elevated makes it challenging for investors to make well-informed decisions,” Xu said. “Therefore, it’s crucial to keep a close eye on the latest developments from the Federal Reserve.”

The Fed does not set the interest rates that borrowers pay on mortgages directly, but its actions influence them. Mortgage rates tend to track the yield on 10-year US Treasury bonds, which move based on a combination of anticipation about the Fed’s actions, what the Fed actually does and investors’ reactions. When Treasury yields go up, so do mortgage rates; when they go down, mortgage rates tend to follow.

Housing market chilled

Rising mortgage rates have put a damper on the spring selling season.

While applications for a mortgage rose slightly last week after three weeks of declines, according to the Mortgage Bankers Association, activity is muted.

“Even with this jump in activity, both purchase and refinance applications remain well below year-ago levels when rates were much lower,” said Bob Broeksmit, MBA president and CEO. “The recent increase in mortgage rates, right at the start of the busy spring buying season, could cause prospective buyers to delay decisions until rates moderate.”

Home buyer sentiment returned to record lows in February, according to a survey from Fannie Mae. After three consecutive months of improvement, sentiment dropped, returning the index closer to its all-time survey low set last October. The most notable drops in sentiment were in those associated with job security and home-selling conditions.

“While the current housing market may not look promising for sellers due to factors such as an increasing number of unsold homes, longer time on market, and decelerating price growth driven by high mortgage rates, there are still opportunities to be found,” said Xu.

For example, Xu said, recent sales data show that the share of first-time homebuyers is up compared to one year ago.

“As a result, sellers with starter homes may see robust demand and retain some bargaining power,” she said.

In addition, she said, the lasting presence of hybrid working models offer home buyers more flexibility in where they choose to live. Rather than competing for a home in denser, more central areas, some buyers will move further away from work if they aren’t commuting every day.

“This trend could make homes with easy access to public transportation systems more attractive to home buyers which, in turn, enhances bargaining power for the sellers,” Xu said.

For sellers who are also buyers, she said, “it is important to note that they can still leverage their record-high equity, even if they have to adjust their expectations to lower asking prices.”

US housing market is short 6.5 million homes

The United States is not building enough homes to account for the number of people setting up their own households. As a result, there is a sizable shortage of new homes after more than a decade of under-building relative to population growth, according to a new analysis from Realtor.com released Wednesday.

The gap between single-family home constructions and household formations grew to 6.5 million homes between 2012 and 2022. However, this figure overstates the housing shortage, since new multi-family homes offer options both to buyers and renters. If multi-family construction is included — which is predominantly rental units — this gap is cut to 2.3 million homes.

In the decade between 2012 and 2022, 15.6 million households were formed. During the same time period, 13.3 million housing units were started, and 11.9 million were completed. This includes 9.03 million single-family homes and 4.2 million multi-family homes. Of those, only 8.5 million single-family homes and 3.4 million multi-family homes are completed.

In the second half of 2021, single-family homes were being both started and completed at the fastest pace in the last decade. The first part of 2022 continued the previous year’s trend until mid-year, when mortgage rates surged as part of the Federal Reserve’s historic campaign to rein in inflation. The housing market felt the impact of the ascent of mortgage rates, red-hot buyer demand cooled and builders started to pull back on single-family home starts.

“Cooling buyer demand and builder confidence led to slower single-family construction and a shift in builder focus to multi-family last year,” said Hannah Jones, economic data analyst at Realtor.com.

The rate of overall housing starts slowed in 2022 while completions climbed. In 2022, roughly 1 million single-family homes were started, which is 10.6% fewer than in 2021, though still more than in any other single year back to 2012.

“While that brings greater supply to the market, most of it will be used for rentals and won’t address ongoing affordability challenges in the for-sale space,” said Jones.

Multi-family building helps, but household formation is outpacing building

Multi-family housing can ease ongoing housing affordability challenges by providing more supply for renters. But while a single-family home typically takes 7 months to complete, multi-family housing takes a lot longer, at 15 months, so it will take more time for those units to come to market.

According to the analysis, multi-family properties made up, on average, 32% of housing starts between 2012 and 2021, but grew to 35% in 2022 as mortgage rates spiked and prices in the purchase market led to a pullback in demand for single-family homes. This led builders to pivot to the multi-family market, which is dominated by rentals. Nearly all — 95% — of multi-family units started through the first three quarters of 2022 were intended to be used as rentals.

Despite this boost in multi-family building, a supply gap persists.

But in 2022, the United States saw the highest level of yearly household formations in the last decade, with 2.06 million new households, outpacing housing starts. This widened the gap between total housing starts and household formations from 1.8 million housing units between 2012 and 2021 to 2.3 million units at the end of 2022, the report found.

The gap between single-family housing starts and household formations grew from 5.5 million at the end of 2021 to 6.5 million at the end of 2022 as household formations rose and single-family home construction dropped.

This trend of underbuilding can be seen in vacancy rates, both for homeowners and rentals.

As households form and housing starts fail to keep pace, the number of homes sitting empty falls. The homeowner vacancy dropped from 2% in 2012 to 0.8% by the end of 2022. At the same time, rental vacancy rates plummeted, reaching a low of 5.6% at the end of 2021 and again in the early part of 2022, before rising slightly to 5.8% at the end of 2022, according to the report.

What needs to happen to close the housing gap?

If building and household formation were to continue at their current pace — growing household formation combined with slowing housing starts — the gap would never close.

Closing the total housing gap requires an increase in both single-family and multi-family supply to help return balance to the housing market by taking pressure off both sale and rent prices, the analysis found.

Looking only at single-family homes, the rate of housing starts would need to triple to keep up with demand and close the existing 6.5 million home gap in 3 to 4 years.

However, if the rate of total housing starts (including both single-family and multi-family building) increased by 50% from the 2022 rate to an average rate of 2.3 million housing starts per year, it would take between 2 and 3 years to close the existing 2.3 million home gap, assuming an average rate of household formations over the past decade of about 1.3 million households per year, the report found. This would take building back to levels seen in the early 1970s and some of the peak months for building in the mid-2000s.

“As inflation and mortgage rates likely soften later this year, buyers are likely to return to the market and be in search of an affordable home, and the ongoing housing supply shortage will only continue to put pressure on the market,” said Danielle Hale, Realtor.com’s chief economist.

The good news is that overall inventory levels are increasing from their pandemic lows.

“With less competition in the market from other shoppers today, some home builders are now offering prospective buyers incentives that may help some new home buyers find success in this challenging market,” said Hale.

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