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JUNE written out on the sand at the beach

We’re about halfway through the year, and starting to see a little bit of a shift in the market. As of late, the market has been defined by rising mortgage rates.

when rates rise they take the elevator when rates fall they take the stairs

To break down what is happening with mortgage rates, we look to the weekly monitor from Freddie Mac where the average 30 year fixed is over 5%.

Mortgage rates continued to inch downward this week but are still significantly higher than last year, affecting affordability and purchase demand. Heading into the summer, the potential homebuyer pool has shrunk, supply is on the rise and the housing market is normalizing.  Sam Khater, Chief Economist, Freddie Mac

There’s a lot of economic uncertainty – inflation, instability in the world, what the Fed is doing – which is causing mortgage rate volatility.

let’s look at the rate environment, going all the way back to the beginning of the year. This is this - going back to December 30th in 2021. We wrapped up the year with 3.1 percent in the average 30 year fixed. And we’ve sort of seen this quick and dramatic rise in interest rates over the first several months where we started to clearly plateau sometime around the third week in April. In the last several weeks since then, we’ve kind of moved horizontally versus up. That’s a good thing. We don’t want to see mortgage rates going higher as it eats into affordability, eats into the purchasing power that consumers have when they come to buy a home. But, we can clearly see this plateauing trend.   https://freddiemac.gcs-web.com/node/25371/pdf  http://www.freddiemac.com/pmms/

Looking at the rate environment this year, where we wrapped up 2021 with 3.1% on the average 30-year fixed, we have seen a quick and dramatic rise in interest rates over the first several months with a plateau around the third week of April.

Average 30 year fixed, 5.09 percent, higher than where we’ve been for the last decade, but below where we’ve been in previous decades before this, going all the way back to the seventies. And I think this is important because sometimes in our business we may say, “Hey, well, the interest rate is five percent right now. But, be thankful because back in the seventies, it used to be 1000 percent. And you should like what you have.” Well, we need to acknowledge, there are a lot of people that have gotten into the business, have just become homeowners, that this interest rate environment is higher than they’ve ever seen before. We need to listen to that. We need to understand that, but also to bring them perspective. Certainly five percent on a 30 year fixed, for anybody that’s been around in this business for some time, is still a very, very good rate. It’s all about perspective. But, certainly seeing the shock of that in the first few months of this year, first half of this year, like I said before, first half of this year, will be defined, in the real estate business, by rising interest rates.   http://www.freddiemac.com/pmms/pmms_archives.html https://freddiemac.gcs-web.com/node/25371/pdf

However, let’s bring some perspective to this. The average 30-year fixed is higher than where we’ve been for the last decade, but below where we’ve been in previous decades – going all the way back to the seventies. Certainly, 5% is still a very, very good rate when we consider the historical rates over the past several decades. 

the 30 year fixed mortgage has followed the 10-Year Treasury. So, the expert response to that is, “I’m following the 10-Year Treasury, and I’m watching that.” And what have we seen this year? We’ve seen the 10-Year Treasury rise. And I’ll show you this. This looks at the 10-Year Treasury yield as compared to the 30 year fixed mortgage, and we’ve seen the 10-Year Treasury yield rise since January and starting to flatten out like we see in interest rates. But, we’re going to continue to watch that for you because, if you go back in time - let me go back to this slide - the average spread has been 1.7. So, think about that. Think about where the 10-Year Treasury is at 1.7 to it, and that’s a 30 year fixed.   https://www.freddiemac.com/pmms/pmms_archives https://www.macrotrends.net/2016/10-year-treasury-bond-rate-yield-chart

The 30-year fixed mortgage has followed the 10-Year Treasury. We’ve seen the 10-Year Treasury rise since January and start to flatten out, like we see in interest rates.

The headlines tend to terrify more than clarify, so what’s the short answer to, “Are we in a housing market correction?” No! A correction of any sort is a decline of 10% or greater in the price of a security asset or financial market. Experts are forecasting almost 9% appreciation in residential real estate this year – where, historically, we’ve seen about 3.8%. We are still seeing very healthy appreciation this year.

The housing market is at a turning point . . . We’re starting to see signs of a  new direction, but the ball is still  in sellers’ courts in most housing  markets.   Danielle Hale, Chief Economist, realtor.com

However, we are at a turning point right now, coming out of two anomaly years in the real estate business, and it is still a seller’s market.

This is a look at showing time going all the way back to the beginning of 2019 - that’s the gray area, 2019 - and the first couple of months of 2020. I’m going to call the pre-pandemic. And the blue section is everything since the pandemic hit, up until the most recent information, April here, of showing activity. Now, I know we’re here in June. You’re going to say, “Well, April doesn’t matter, and it’s going to come down from there.” And I would agree. I would agree. But, that’s the most recent information we have. Here would be my case and my point in this graphic and why I believe it makes sense to use it right now. We’re clearly heading back somewhere that’s going to be pre pandemic level demand. So, not going back to prepandemic prices. Nobody’s saying that. But, if you look at demand, pre pandemic, certainly we’re going to come off of the highs of 2020 and 2021 back to pre-pandemic level demand, which, oh, by the way, 2017, 2018, 2019, great, great years in residential real estate in this country. But, that just gives a visual image to demand and where we’ve been - again, two anomalous years in real estate in 2020 and 2021 where interest rates drop. The meaning of home changed across this country. And we saw demand and we saw price increases because of the lack of supply that we’ve never seen before in real estate.   https://showingindex.stats.showingtime.com/docs/lmu/x/UnitedStates?src=page

According to the latest released numbers, showings are still high, though we will begin to trend back to the pre-pandemic level demand.

Are we in a market correction? And existing home sales are down. So, let’s look at existing home sales. This is as of April, the seasonally adjusted rate, 5.6 million homes. Well, again, here, let’s look at 2017, 2018, 2019, pre pandemic years, and then, 2020 and 2021 that I’m going to go ahead and say, again, are anomaly years. Where are we heading with existing home sales? Back somewhere in the neighborhood of where we were pre pandemic. Pre-pandemic sales were 5.5, 5.3 million. Most recently here in April, seasonally adjusted, 5.6 million units in existing home sales. That’s not total home sales, just existing home sales. So, if we look at that from a demand perspective, from an existing home perspective, really what we’re looking at is a situation heading back to where we were prior to the pandemic. And certainly the pandemic spurred the real estate market.  https://www.nar.realtor/research-and-statistics/housing-statistics/existing-home-sales https://www.nar.realtor/newsroom/existing-home-sales-retract-2-4-in-april

And looking at the latest released numbers for existing home sales, we can see again that trend to the pre-pandemic level of sales. However, we are still seeing national averages of 17 days on market with over 5 offers on homes for sale. As we head back towards those pre-pandemic levels, let’s not forget that 2017-2019 were great years for the real estate market.

Mortgage rates are likely to plateau near current levels... The financial markets have attempted to price in the impact of Fed actions over this cycle, and they are likely also pricing in the economic slowdown that will result. Once we are past this rate spike and associated volatility, MBA expects that potential homebuyers may be more willing to re-enter the market. Mike Fratantoni, Chief Economist, MBA
Are we in a market correction? And existing home sales are down. So, let’s look at existing home sales. This is as of April, the seasonally adjusted rate, 5.6 million homes. Well, again, here, let’s look at 2017, 2018, 2019, pre pandemic years, and then, 2020 and 2021 that I’m going to go ahead and say, again, are anomaly years. Where are we heading with existing home sales? Back somewhere in the neighborhood of where we were pre pandemic. Pre-pandemic sales were 5.5, 5.3 million. Most recently here in April, seasonally adjusted, 5.6 million units in existing home sales. That’s not total home sales, just existing home sales. So, if we look at that from a demand perspective, from an existing home perspective, really what we’re looking at is a situation heading back to where we were prior to the pandemic. And certainly the pandemic spurred the real estate market.  https://www.nar.realtor/research-and-statistics/housing-statistics/existing-home-sales https://www.nar.realtor/newsroom/existing-home-sales-retract-2-4-in-april

Let’s take a look at the top expert forecasts for 2022. We see anywhere from 6.9 million homes sold this year to 6.1 million. In 2021 we sold 6.9 million homes. Most are saying that the interest rate environment we’re in will likely impact the market to the tune of about 10%. At 6.9 million homes, that is a reduction of about 700,000 homes less we would sell this year. – right around that 6.2 million mark.

There have been six recessions in this country. And what happened here? You can see it just in the graphic, four out of the six times home prices actually appreciated. Two times they depreciated. Early nineties, less than two percent, I call it marginal depreciation. But, what everybody remembers is 2008 when homes lost almost 20 percent value. A lot of people were hurt then, a lot of family members, a lot of people that maybe we know and maybe ourselves had to make decisions on housing or do something, a short sale, deed in lieu, foreclosure, whatever it was, a lot of people affected back then. And when they hear recession - when consumers hear recession, they think that.  Many people think every time we hit a recession homes lose value. Simply not true.   https://www.corelogic.com/blog/2019/03/housing-recessions-and-recoveries.aspx https://www.thebalance.com/the-history-of-recessions-in-the-united-states-3306011 https://www.corelogic.com/intelligence/find-stories/corelogic-hpi-posted-record-year-over-year-growth-in-2021/

A recession does not mean there will be a housing crisis. We have seen 6 recessions in this country, and during 4 of those recessions homes appreciated in value. Keep in mind, one of the recessions (1990s) homes only depreciated in value by less than 2%.

If you are looking to buy a home, I would still recommend you do so even at the higher interest rates because we have no reason to believe that home prices will stop appreciating. Home values going up is only a problem when you’re trying to buy. When you own, it’s a gift. Shivani Peterson, Mortgage Expert

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