The Drop in Mortgage Rates Brings Good News for HomebuyersOver the past few weeks, the average 30-year fixed mortgage rate from Freddie Mac fell by half a percent. The drop happened over
When Selling or Buying a Home Today Things are Changing Fast! Here's What you Need to Know Today
Dated: May 26 2022
There are many hot topics in the real estate industry right now. I’ve picked a couple to talk about today for the main market report. There’s been a conversation about the real estate crash question, is the market going to crash? Second, housing pricing, where is it now and where is housing pricing heading for the rest of the year?
And then we’ll touch a little bit on affordability as well, which is a big question on a lot of people’s minds, the goals that give everyone the visuals and the information you need to be comfortable understanding these topics. My name is Cory Harter, I’m with the Homes by Chris Harter Real Estate Team and eXp Realty. If you’re looking to sell you your home fast in Omaha or Council Bluffs will be able to help. I’m really looking forward to discussing these topics today so let’s go ahead and jump right in.
The first question is why we’re not heading for a housing bubble. You can’t turn on the news or look at something or not hear something about the housing market, some type of bubble, everybody’s talking about it, right?
Home values go all the way back to World War II. If you think about that, the reason we’re going back to World War II is that it was the start of modern-day housing, the boom here in America. If you think about it, the GIs are coming back from the war and they are provided a GI Bill which provided for education and it also provided for our military heroes to go out and buy a home.
And ever since then, up until today, there’s been one time in this country where homes lost significant value and that was back in 2008. I’m sure most people remember that. So back in 2008, we saw homes lose value really for two reasons. The first reason was loose lending standards. You think back then, no income, no job, no verification was required and we know how that ended up.
The second reason for the crash was people took the equity out of their homes, cashed it out, bought boats, jet skis, went on vacation. They basically financed their lifestyle for a while thinking that it would never end. Well, we all know how that ended, very poorly. So let’s recap real quick. Apply for a loan that you don’t have to qualify for and then you take out the equity of your house, plus some, you cash it out and that’s what ended up in 2008 when homes lost value.
So it’s important as we start talking about this, set up the conversation that we understand, that 2008 was the one-time homes lost value in this country. Now, the other question that sort of plays into this crash question is everything coming out over the past two years with COVID, take forbearance. Now, remember this was a tool given to those to help weather the storm in their housing payments.
And that’s caused a lot of concern for people and what’s going to happen there. Well forbearance numbers, they continue to edge downward. The most recent numbers in April, 690,000 loans were still in forbearance, well below where we started out in May of 2020. So what’s happened to those coming out forbearance and how is this going to turn out?
And at the start of this, there are a lot of question marks about what’s going to go on, but we’re getting a clearer and clearer picture every day. One of the latest statistics that comes out of this is that 92% of the people that entered forbearance have come out of it. And those that have come out of it as of March 31st here’s the clearest picture.
Four out of five people either went through a modification or paid it off in full and there were no issues. That’s a very, very positive sign. So now there are at least 18% that are still in some sort of trouble. We don’t know what that position is. We know they have no loss mitigation plans or they’re already into the loss mitigation plan. But the bottom line is, if you talk about the crash, this is not going to be a factor in a crash because people have options today.
If you have been significantly affected by the pandemic and you sell your house with an appreciation that you’ve seen over the last couple of years, you pay your commission, put some money in your pocket and you get on the other side of that crisis that you and your family are experiencing. So two things we just covered, understanding why we had the housing crash back in 08 and then understanding the current piece, which is the forbearance, which is critically important.
But the bottom line is here and Danielle Hale says it well. He says, “We’ve learned from history that prices can fall. The important question now, if that’s going to happen right now, and it’s really hard to say.” Meaning it’s hard to say that will happen because things are very, very different today. And I want to walk you through a couple of graphics that do a good job of visually communicating how things are different today.
So let’s go back to 08. Loose lending standards drive the housing crisis and let’s look at where we are today. Well, the bottom line is lending standards are nothing like they were back in the early 2000s. If you think back then, we talked about the loans that were in the market. We talked about the things that people had done that caused the crisis. Well, the bottom line is lending standards are nothing like they were back in the early 2000s.
It’s gotten harder to qualify for a loan after the housing crisis of 08. That’s when the qualified mortgage came out and then you have to demonstrate the ability to repay, all those things that we know about the mortgage business are about how hard it’s gotten to qualify. This graphic tells a story of the differences between today and back then. And if you need further proof of how this is playing out in the market, this has really led to sort of a foreclosure market in the country. That’s at an all-time low also.
Now the last couple of years certainly there’s been a moratorium in place and the federal government had stepped in and said, “Look, we’re not going to process these foreclosures during the pandemic.” And those mortgages are coming back. But back during the housing crisis, they were in the shaded red, over 9 million people went through foreclosure. And we certainly don’t want to see anybody going through that obviously, it’s a very tragic thing. But it’s also a reality of business, unfortunately, and it is going to happen.
But these tighter lending standards have led to fewer foreclosures in the market. That makes a lot of sense. If you have a highly qualified or a better-qualified borrower, you’re going to see fewer defaults and we’re seeing exactly that. That certainly is not going to play into a crash. And if you need a further example of that, this is a look at the loans that have been given to people with a credit score of less than 620.
Again, go back to the housing crisis, made so many loans. This is in the volume of billions of loans with a credit score of less than 620. And where do we stand in this, the third quarter of 2021? The most recent information from the federal reserve is a fraction of where we were back in 08. So we can clearly say lending standards are different and the whole story’s different.
So the other question a lot of people are bringing up is as homes get expensive, as homes have risen in price, people aren’t going to be able to support that debt, and that’s going to be a challenge. Well, mortgage debt really isn’t the challenge. Again, this is a slide from the federal reserve. This is the household debt service ratio for a mortgage, and that’s as a percentage of the disposable personal income.
So think about the total mortgage payments divided by total disposable income. Where we sit today is much, much lower than when we were back in the financial crisis of 2008, even lower than we were in the ’80s and ’90s. So why? Why is that? That’s a component of rising wages. That’s a component of interest rates that we’ve seen. And people that are holding mortgages today are much, much better positioned than where they were back in the financial and housing crisis of 08.
There’s a lesson from that that we can take away is a lot of people said coming out of that housing crisis, “We don’t want to do this again. We’re going to maybe pay down our mortgage. We’re going to put more money down. We’re not going to cash out the equity that we have in our home.” As you can see in the numbers that are coming out today, here are the cash-out refinance numbers that tell the same story. This is a look at the mortgage payments on cash-out refinances from Freddie Mac and the difference in the annual payment for cash-out refinances.
Look at the previous payment, then the new payment after cash-out refinance on an annualized basis. Back in six, seven, and eight, 3 to $4,000 difference in the mortgage payment, somebody who’s jumping up to be able to go through a cash-out refinance. Well, what do we see in 2020 and 2021? $66 versus 34, very little change in mortgage payments if someone goes through a cash-out finance.
Certainly, that speaks to the low-interest rates we’ve seen, but it also speaks to people not refinancing and harvesting the equity from their home and going out and doing something else with it. A lot of lessons were learned back in 08 and where we can safely say that the market dynamics are very, very different right now in the housing than what they were back then. So the bigger question right now, though, is what’s ahead, right?
I think many people right now are asking, what is the rest of this year going to hold. We’re here in May, the fed started off the month by raising the fed funds rate. A lot of questions about that and the talks of a recession down the road, home prices are going up, interest rates are going up. So a lot of questions about what’s ahead.
The most recent updated home prices forecast from seven reputable forecasters for 2022 prices. The average of these forecasters is 9% appreciation. Many people are asking are homes going to lose value later in the year? Certainly not what these experts are saying for this year. If we look at these experts, they start to fall between 8 and 10%. We started the year off at about 5% appreciation and rising slowly each month since then.
We said these forecasters had a bias to the upside, meaning they were raising their forecasts and we weren’t certainly seeing that today. If we look beyond this year, the home price expectation survey as of the first quarter of this year, they’re again calling for a 9% appreciation this year. We see alignment there with the average and forecasters for this year so and really and beyond this year.
So moving into what we’re going to call maybe a much more normal rate of appreciation. Before the pandemic, the average appreciation in a home was about 3.8% in this country. And you see this right in that neighborhood in the next four years or so afterward also. So anybody still wondering if this is the top of the market, should I buy right now, forecast for price appreciation going forward should help you really in making a very confident decision from what we just discussed.
What the home price expectation survey does as well is looking at the cumulative home price appreciation by 2026. If you look at this, they sort of ranked them by the optimist, the pessimist, and then the average of all panelists in the middle. Optimists say a 46.5% appreciation, pessimists 10%, 27% appreciation by all by 2026. So depending on where you sit, I think even if you’re a pessimist in this market, they’re calling for appreciation here between now and 2026.
And again, I think there are still a lot of people saying at least what I’m hearing, I’m going to sit on the sidelines and I’m going to wait for prices to drop. And these forecasts say I don’t know if that’s going to happen. It’s important to understand if you’re thinking about buying today when we talk about rates right now, we’re certainly seeing rates in the first four months of this year rising.
We started out about 3.1% of the year, right now we’re well over 5% on the average 30-year fixed. Bill McBride says this, based on the current estimate for peak fed rates, somewhere between 3.5 to 4%, the 30-year fixed mortgage will likely peak between 5 and 5.7%. There is some variability in relationships so we might see rates as high as the low sixes.
This depends on inflation and the fed funds rate, but they don’t really expect rates to be moving higher than that current rate, although six is possible, which in some instances we’re already here. Seeing here from Bill McBride saying six is likely to be the top end, there are a lot of things that play in interest rates obviously.
It’s certainly not an easy dynamic to forecast, but let’s look at inflation for a minute. That’s what we really need to be looking at. And inflation is the enemy of the long-term interest rate, right? The fed’s action is to tame inflation so we’re going to watch that. McBride here saying I think the high side of this is at the sixes, I hope that helps you in the coming year to understand what’s going on.
So moving on, a lot of what we’ve talked about with prices rising, mortgage rates projected to continue rising, it’s really making people have questions about affordability. So what I’m going to do today here is walk you through where affordability is right now and what it means for the housing market going forward. And we want to start with this quote from Bloomberg.
New data from the Harris Poll shows that 84% of Americans plan to cut back on spending as a result of price spikes. More than 70% of respondents said they’re feeling the effects of inflation, the most in gas prices and groceries. And I think we can all relate to that, I know we can. So we’re feeling it at the gas pump, the grocery store and many other places right now. Prices are rising all around us and it’s impacting what we can spend on day to day basis.
For someone who’s thinking about buying a home, that’s a real concern and it brings affordability into the question. Where this is really impactful and really puts the most pressure is on that first time home buyer, the person who’s looking to really jump into the housing market, build their net worth, grow their financial future, and it’s becoming more and more challenging for them to do that.
If you look at January of 2021, mortgage rates were at a historical low. A typical mortgage payment was about $1,200, a little north of that. Fast forward to where we are today in this rising mortgage rate environment, things are different.
If we think about where mortgage rates are projected to go and let’s say mortgage rates later this year are around 5 1/2%, well they’re already here. Must look at what experts are saying and what’s projected to happen through that mortgage rates, the payments jump actually to over $1,700. So if you’re talking about $1,200 to $1,700, a $500 difference, that’s putting a lot of concern in people’s minds as they start thinking about it.
And it’s costing not only more to buy a home, but all in all the pressures around all the other prices increasing, gas, grocery like we talked about before. So the first-time homebuyer in particular feels this pressure more. So let’s put this all in context. And what can we see right now is that affordability is really approaching more historical levels. This is the housing affordability index. It goes all the way back to 1990.
So let’s break this down and look at it. If you look at where we are on the right today, 135.4, that’s the index that NAR, National Association of Realtors is reporting. Homes are not as affordable as they were over the past 10 to 12 years and certainly not as affordable as they were in those orange bars, those areas, which was the housing crisis. So that’s when distressed properties dominated the market, homes are being sold at a massive discount.
We’re certainly not there yet, but as we’ve seen, prices are rising, mortgage rates are rising, homes are not as affordable as they were even over the past couple of years. It’s important to remember that affordability is really a major of three key things. We mentioned prices and mortgage rates, but it’s also wages. Right now, all three of those things are ticking up. But historically, over the past couple of years, mortgage rates have kind of offset some of those rising prices.
We’re not seeing that anymore so people are feeling affordability challenges. Now, if you go all the way back to 1990, what we can see is that homes are more affordable than at any other time leading up to the housing crisis. This context is very key as we’re having this conversation. When people say homes aren’t affordable anymore, we have to say as compared to when.
So now I want to continue on this and share this quote from NAR because I think this also helps paint a picture of what’s really happening in the world around us. It says the average consumer is spending an additional $429 monthly for items other than shelter. And I can probably argue that fact, I bet it’s more than that right now. But meanwhile, the average weekly wages rose $212 per month so the consumer is short by $217. That’s the direct result of inflation and the things that we’re seeing around us, how it simply costs more to live right now.
So this means the average consumer will be looking for a home that is $41,793 less expensive. So the average consumer that’s looking to buy a home is reducing their price point. That’s just the real facts of what’s going on today. That is exactly what these dollars and cents are saying. Rising mortgage rates. We know that’s going to impact slightly. People are going to make a decision.
They’re either going to jump in and they’re going to say, “Yes, I want to go ahead and get the house. I want to get ahead of the rising interest rates, the rising prices.” Or they’re going to say, “This isn’t for me.” It’s going to cause people to make a decision. But the overall takeaway is that buyer demand is still strong. This isn’t going to impact the overall demand that we’re seeing right now.
So many buyers in the market and really the inventory is so few homes for sale, changing needs, buyer demand is very, very real. Yes, it will put some pressure on that lower price point, but overall demand is still really, really strong. So when buying a house today, it’s about getting ahead of rising interest rates, rising prices, really thinking about long-term net worth development, net worth growth and your financial future of buying a home.
And I hope you found this information I’ve shared today helpful for this May 2022 market report. If you have additional questions or would like to reach out you can call or text to (402) 378-9462, or you can click the link below to schedule a time to talk. Our website is www.homesbychrisharter.com I hope everyone has a great day. Again, thank you so much for your time.
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