The U.S. unemployment rate is at a 50-year low, and consumer confidence remains high. In fact, the University of Michigan’s latest Surveys of Consumers found that Americans have their most positive personal finance outlook since 2003.
However, if you follow national news, you’ve probably heard speculation that we could be headed toward a recession. Global trade tensions and a slow down in the GDP growth rate have sparked volatility in the stock market, leading to economic uncertainty.
Given these differing signals, you may be wondering: How has the U.S. housing market been impacted? Where is it headed? And more importantly… what does it mean for me?
Mortgage rates are near historic lows.
In August, Freddie Mac reported that the average 30-year fixed mortgage rate hit its lowest level since November 2016, falling to 3.6%, down a full percentage point from a year earlier.2 Variable mortgage rates also fell when the Federal Reserve cut interest rates at the end of July for the first time since 2008.
This was welcome news for many in the real estate industry. Freddie Mac predicts that low interest rates and a robust job market will help the housing market remain strong despite the threat of recession.
“There is a tug of war in the financial markets between weaker business sentiment and consumer sentiment,” said Sam Khater, Freddie Mac’s chief economist. “Business sentiment is declining on negative trade and manufacturing headlines, but consumer sentiment remains buoyed by a strong labor market and low rates that will continue to drive home sales into the fall.”
What does it mean for you?
If you’re looking to buy a home, now is a great time to lock in a low mortgage rate. It will shrink your monthly payment and could save you a bundle over the long term. Or if you plan to stay in your current home for a while, consider whether it makes sense to refinance your mortgage at today’s lower rates.
Prices continue to rise at a modest pace.
According to the S&P CoreLogic Case-Shiller Indices, housing prices continue to rise. But the rate at which prices are rising is slowing down. For May 2019, the National Home Price Index rose by 3.4%, down from 3.5% the previous month.
Of course, national averages often don’t present the whole picture. Some markets have seen modest declines, while other areas are witnessing double-digit increases. The key differentiating factor in most cases? Housing affordability.
Since 2012, home prices have increased at about three times the pace of wages, according to National Association of Realtors chief economist Lawrence Yun.
“Housing unaffordability will hinder sales irrespective of the local job market conditions,” said Yun. “This is evident in the very expensive markets as home prices are either topping off or slightly falling.”
But what about all this talk of a recession? Will we see housing values plummet like they did in 2008? Economists say no.
If we look at history, the real estate crash experienced during the Great Recession isn’t typical.
The recent Housing and Mortgage Market Review report from Arch Mortgage Insurance provides data to support this. “What we found is that the next recession is likely to be far less severe on the housing market than the last one. It’s not that this time is different; it’s that last time was really different from historic norms.”
“A large decline in national home prices is unlikely in the next recession,” Arch economists write. “A persistent housing shortage should help cushion home price declines.”
What does it mean for you?
If you have the ability and desire to buy a home now, don’t let the threat of a recession hold you in limbo. The market is cyclical, and it will experience ups and downs. But over the long term, real estate has consistently proven to be a good investment.
Starter inventory remains tight while luxury market softens.
As we’ve seen in the past, it’s become a tale of two sectors.
The low end of the market remains highly competitive as buyers compete for affordable housing. A lack of new construction during the last recession led to an undersupply of starter homes. This trend continues—despite growing demand—due to a lack of skilled workers, rising land and material costs, and a slow permitting process in many areas.
The result? There’s a shortage of homes for sale that Americans can actually afford to buy.
The luxury market, on the other hand, has softened. Economic uncertainty, changes to tax laws, and rising prices have slowed demand. Plus, to recoup their higher costs, builders flocked to this segment—causing an overabundance of supply in some areas.
“If you’re selling an entry level home, you’re probably still looking at a pretty competitive market in most places,” according to Danielle Hale, chief economist at Realtor.com. “But if you’re selling a more expensive home you probably have to adjust your expectations.”
What does it mean for you?
Move-up buyers, you’re in luck! If you’re ready to trade in your starter home for something more luxurious, you may get the best of both sectors. We’re still witnessing strong demand for entry-level homes, giving sellers the upper hand. At the same time, buyers of high-end homes are finding a greater selection (and more negotiating power) than they’ve had in years.
Investors are buying homes at record levels.
There’s one group that hasn’t been slowed down by lack of affordability or economic uncertainty: investors.
According to CoreLogic, investors are purchasing homes at a record pace. In 2018, the share of U.S. homes bought by investors reached 11.3%—the highest level since the company began tracking nearly 20 years ago.
Notably, this increased activity wasn’t led by institutional investors, but instead by small and individual investors focused on the starter-home segment. Declining interest rates and an uncertain stock market have led investors to flock to real estate as they seek out greater stability and higher returns.
“With declining mortgage rates … they’re searching for a better return for their money,” said NAR chief economist Lawrence Yun.
What does it mean for you?
If you’re looking for a way to “recession proof” your money, you might want to consider investing in real estate. People will always need a place to live, and (unlike the stock market) a rental property can provide a steady source of cash flow during uncertain economic times.
While national real estate numbers can provide a “big picture” outlook, real estate is local. I can guide you through the ins and outs of the Mammoth Lakes real estate market and what is most likely to impact sales and home values in our town.
If you’d like to talk, contact me to get started.
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While most individuals are focused on the fluctuation in current housing prices, many are failing to recognize the large role interest rates play in the monthly, yearly and overall cost of their real estate purchase.
Although interest rates have been increasing lately, they are still near historic lows in the United States. The average 30 year mortgage interest rate had a very slight increase to 4.60 percent the week ending August 6, from 4.58 percent last week. Last year at this time, the average was 3.76 percent. This presents a significant opportunity for those looking to purchase a primary residence or investment property. It is hard for me to imagine that my husband and I bought our first home in 1984 at an interest rate of 13.25 percent!
While qualifying is currently much harder than it has been in previous years, those with adequate credit and income are having no problems. The chart below shows several different purchase prices and their corresponding monthly payments at different interest rates. Small differences in the rate can make and a large difference in the monthly payment and an extremely large difference over the life of the loan.
While most buyers are very concerned that the housing market will drop several additional percentage points, a raise in interest rates could cause them to pay significantly more. For example, let’s assume a buyer purchases a $300,000 home and puts 10% down. If their loan was currently at 4.5% and fixed for 30 years, their monthly principal and interest payment would be $1,368. If rates escalated to 5.5% their monthly payment would raise to $1,553. They would be paying an additional $185 a month and $2,200 in interest every year. Over the life of the loan that would be an additional $66,000 in mortgage interest. Housing prices would have to drop an additional 10% to equal the same principal and interest cash output over the life of the loan caused by just a 1% rise in interest rates.
Mortgage rates are just one of many items to consider when making a real estate purchase, but it is amazing to see the large scale effect they will have on the overall cost of the property. While there is no crystal ball to predict the future, it is very likely that rates will rise and home prices will flatten out and eventually rise.
Jake Rasmuson, Coldwell Banker – LeeAnn Rasmuson & Associates, Agent and friend 🙂