Following market trends and indicators will put you in the driver seat if a real estate purchase is in your future. From home prices to mortgage rates, knowing how to interpret market data provides you piece of mind as an investor. After all, a home is an investment. Ideally you stay active in the market and watch for opportunities to lower costs with seller incentives and an understanding of the cyclical nature of mortgage rates. While home prices primarily inch up, rates rise and fall creating opportunities to refinance and save.
Buy Now or Wait
In 2023, the market is seeing action early. There are two camps, buyers seeking the lowest dip in home prices and those focused on mortgage rates pushing under 6%. You’re not likely to get both in 2023.
Home Price Shoppers Get Going
If you’re looking for steady prices and nominal competing offers, late winter early spring is your window. As you’ll read in the data to follow, demand is building foreshadowing an increase in buyer traffic and fewer seller incentives as we move firmly into the Spring season.
Rate Shoppers Hold Off
If a mortgage rate under 6% is your primary criteria, you’ll need to wait until later in the year or incorporate a rate buy down in some form. Your penalty for waiting will be an uptick in prices and more competition.
Housing Demand is Rising
The more demand for homes, the stronger price stability and growth. A key indicator of housing demand is mortgage application data. An uptick in applications is a 30 to 90 day advance indicator of housing demand. The average buyer closes on a home within 90 days of applying for a mortgage. Once those applications change to closed sales, the demand will begin reflecting in home prices.
Mortgage application data normally slows in late Fall continuing through the holidays and into January. In an unusual twist, mortgage applications have consistently risen since early November of 2022 with a week over week upward spike of 25% in mid-January. With a timeline of 30 to 90 days from application to close, we could see increased home sales data as we exit first quarter preventing any foreseeable significant home price declines.
Homes sales data lags the housing demand indicator-mortgage application data-but is a key trigger for home prices. Once we are in a Spring / Summer pattern of strong home sales, prices will hold firm and even climb.
Inflation Data Calms
Mortgage rates follow inflation, specifically The Consumer Price Core Index (Core CPI). This key indicator of where mortgage rates will go factors out the highly volatile food and energy components that can’t be impacted with monetary policy making it a quick easy resource to get an accurate pulse of economic health on a monthly basis. We experienced how quickly a change in inflation can impact mortgage rates positively late in 2022 when two months of Core CPI incremental declines dropped mortgage rates .75%. Simultaneously the Fed was hiking the federal funds rate in an effort to maintain the inflationary decline. The exception to the parallel between inflation and mortgage rates is any type of artificial stimulus like the quantitative easing (QE) we experienced during the pandemic.
Our first Core CPI report of the year has inflation holding steady allowing rates to remain in the low 6’s. The Fed has echoed the positive inflationary picture hiking the Federal Funds rate a mere .25% in the first actions of the new year.
The Fed does not determine mortgage rates, the market does. As the Fed hiked the prime lending rate in 2022, mortgage rates followed the inflation numbers, not the federal funds rate. The Fed rate hike of .75% in June coincided with a mortgage rate decline of as much .50% on some programs only to shift back up when the Fed actions failed to quell inflation.
A shorter term indicator for “today’s rate” is the 10 year treasury bond yield. When the 10 year bond yield goes up, so do mortgage rates. Both move daily, though the big swings are driven by inflation and any stimulus action on the part of the Fed. The 10 year treasury has been trending down since early November as have mortgage rates. Mortgage rates have dropped approximately 1.25% since their peak in October 2022.
The chart below highlights the historical relationship of mortgage rates and inflation The gray vertical bars represent recessionary periods often accompanied by artificial stimulus offering a brief departure from their cohesive movement.
Mortgage Rate Forecast
Once inflation showed signs of cooling in October of 2022 (reported on November 10), mortgage rates steadily declined back to the low 6’s from their high of almost 7.25%. A look back at 2022 is the perfect example of how to predict where mortgage rates will go; they followed inflation, not the direct actions of the Fed.
The Fed can and did impact the pace of mortgage rate hikes with the abrupt departure supporting quantitative easing which sent shockwaves through all segments of the financial markets spiking mortgage rates with equal vigor to that of inflation. As inflation declined in the Fall of 2022, rates began to settle back down.
The forecast for 2023 is a steady mortgage market gaining downward momentum in the second half of the year with rates pushing back into the 5’s. Hints of inflation returning could alter this trajectory.
Housing Supply Remains Tight
Current demand for homes is outstripping supply. That not only eliminates the chance of a bubble like we saw in 2008 but also prevents significant home price declines beyond the minor corrections already experienced in those markets that saw the largest accelerated spike in home prices over the last 18-24 months. In 2007 we had over 4 million active listings with a demand of approximately 1.1 million. The National Association of Realtors (NAR) reports current active listings as of January 2023 at 970,000 against a current demand of roughly 2.0 to 2.5 million and growing. Supply data reflects both new and existing homes available for sale.
Housing supply persists as a double edged sword to our recovery. A shortfall in the supply of homes to purchase drives prices up. As home prices continue to creep up so does a key indicator of inflation, shelter costs. Shelter represents approximately 39% of Core inflation.
All projections point to an ongoing shortfall of homes for sale signaling there is no reason to delay a purchase with the hope of more choices or significant price drops.
Home Price Corrections
Home price corrections are a lagging indicator on the health of the overall housing market. A price reduction in one month is not indicative of a trend nor is it predictive of future home prices. Home prices are adjusting geographically with markets that surged over 40% in the past two years experiencing the largest corrections. According to CoreLogic’s Home Price Index, we hit the peak in April of 2022 with the national average home price up 20.1% over the previous year, the highest single year jump in over two decades. Price corrections have largely run through the market in the second half of 2022 as we saw home sales stall out and seller concession emerge. The overall market correction is relatively small averaging 1% to 3% with pockets of price corrections as high 10% in markets that saw the largest surges. Experts forecast the U.S. housing market returning to a balanced growth rate through 2023. A calm without a crash and a return to more stable conditions is the forecast.
Behind the Home Price Crash Headlines
Huge gains in home prices will be largely absent in 2023. This is not to say we will see declining home prices, rather the year over year lookback data incorporates the price surges of the last 18 months. As prices moderate, the forecast for home price appreciation from November 2022 to November 2023 is 2.8%. With the majority of the home price corrections behind us, this much needed relief from the rapid acceleration of home prices since 2020 could re-shape our affordability picture creating opportunity for more buyers. See my recommendations in the closing paragraph for ideas to maximize your housing dollars.
Foreclosure Data
Mortgage payment delinquencies remain the exception at 2.8% overall and pacing at 19 consecutive months of decline through October 2022. Foreclosure rates are near record lows at 0.3% during that same time period.
Lending practices prior to 2008 encouraged homeownership at the expense of financially sound lending practices across all lending institutions. Coupled with an over supply of housing, the market hiccup of 2008 sent the industry into the largest recession in recent decades. The circumstances that drove the crash are fully absent today with no looming loopholes allowing for their return.
Maximizing Your Housing Dollars
- Exercise temporary rate buydowns to improve affordability in the short-term. If rates decline, borrowers recoup their buydown dollars in a refinance with remaining escrow funds applied directly to principal at time of payoff.
- Encourage exploration of VA and First-Time Home Buyer programs offering as little as 3% down and nominal fees.
- Low Income programs that exempt the buyer from mandatory additional fees.
- Add a Co-borrower or Non-Occupant co-borrower to improve qualifying criteria.
- Get that credit score up – mandatory price adjustments in automated underwriting weigh heavily on those with credit scores below 680 and favors those at 740+. We work with borrowers to hike those scores while they continue their home shopping journey. Note: your mortgage credit score is different from the ads you see to boost scores simply by paying fee or pressing a button.
- Home appreciation continues to trend upward removing any data supported justification to wait on a home purchase.
By Sheila Landis for The Landis Group
