all-time highs

Apache is functioning normally

Weekly housing inventory data

We will start with the price cut data percentage because it deserves a detailed explanation. 2022 was a historic year for housing as we had the most significant home sales crash ever, and mortgage rates went from 3% to 7% in the same year. That type of move is very abnormal and home sales simply collapsed, especially in the second half of 2022. 

Naturally, some people thought home prices would crash in 2023 as many market players said prices always follow volume. But not only did that not happen, home prices quickly got back to all-time highs. Then something even crazier happened: mortgage rates shot to to 8% but the number of homes taking price cuts never went above 2022 levels during this time.

In fact the price cut percentage consistently stayed 4% below 2022 levels. I believe this is due to the fact that home sales aren’t crashing anymore like they were in 2022. What happened between June 2022 to June 2023 can be confusing, so if you need more clarity I suggest listening to this podcast.  

Here is the price cut percentage data for the same week in other years:

  • 2023 38%
  • 2022 42%
  • 2021 27%

As you can see, affordability is an issue, and the price cut percentage is higher now than in any period from 2015-2021, but still below 2022 levels.

Now lets take a look at the weekly inventory data. Last year, according to Altos Research, the seasonal peak for housing inventory was Oct. 28. the seasonal peak this year was on Nov. 17.

  • Weekly inventory change (Dec. 1-Dec 8): Inventory fell from  555,717 to 546,424
  • Same week last year (Dec. 2-Dec. 9): Inventory fell from  550,302 to 536,409
  • The inventory bottom for 2022 was 240,194
  • The inventory peak for 2023 so far is 569,898
  • For context, active listings for this week in 2015 were 1,050,971 

The new listing data has been trending at the lowest levels ever for 17 months now. What 2023 data has shown me is that even with mortgage rates heading toward 8%, new listings data didn’t take a new leg lower — it stayed remarkably consistent all year long. This is a positive, and something I discussed on CNBC months ago, that we should see some flat-to-year-over-year growth data in the second half. Since most sellers are also buyers, getting growth in this data line will be a positive for home sales in 2024.

New listings data last week

  • 2023 43,188
  • 2022: 39,149
  • 2021: 46,881

In 2024, what we want to see is new listings data grow back to 2021 and 2022 levels in the spring. This will bring more inventory to the marketplace and get more sellers, who will also be buyers.

Mortgage rates and the 10-year yield

Last week was another interesting week for bond yields and mortgage rates. We almost broke under 7% mortgage rates for the first time in a while, getting as low as 7.04%. We ended the week at 7.09%, and this was during jobs week where had two weaker-than-anticipated labor reports and two better-than-anticipated reports. Regarding jobs Friday, I wrote this article on why the Federal Reserve was wrong about inflation and jobs.

We have a big week ahead of us. For now I would focus on the 4.10% level on the 10-year yield since we bounced on that level twice last week. We have two inflation data points this week and if both come in lighter than anticipated and the Fed gives a dovish outlook, that is the best case for the 10-year yield to fall below 4% and get us mortgage rates below 7%.

Purchase application data

There was some confusion over the purchase application data this last week: The unadjusted data showed 35% week-to-week growth and the seasonal adjusted data showed a slight decline of 0.03%. We always take the seasonal adjusted numbers no matter what. Just be mindful of purchase apps around the holidays.

Since Mortgage rates have fallen from 8% and are now near 7%, purchase apps have had four positive and one flat weekly print. This makes the year to date count 22 positive prints, 23 negative prints and 2 flat prints. Clearly we have a positive trend here in purchase apps which is typically the normal with a 1% move in rates. But again, we are working from a low bar here in this data line and we will need at least 12-14 weeks of positive growth trends to have it been something material.

The week ahead: Fed and inflation week

Ok, here we are heading into Christmas and the question is: will the Fed be the good Grinch going into Christmas or the Grinch we see for 93% of the movie? There is no rate hike coming of course, but what the Fed says matters a lot, especially what Chairman Powell says in the Q&A portion of the press conference. Inflation data is key as always, because we wouldn’t be talking about rate cuts in 2024 if the growth rate of inflation was at 5%-8% year over year. We also have retail sales coming up this week so we will be keeping a close eye on all of these reports.

Source: housingwire.com

Apache is functioning normally

JOLTS, the job openings and labor turnover survey, used to be a very forgettable report.  On a scale of potential market movers, we’ve always assigned it the lowest possible rank.  But that changed over the past year and a half.  As the Fed and the market searched for signs that an ultra tight labor market might be loosening, job openings have emerged as a highly tradeable metric despite the fact that they run a full month behind nonfarm payrolls.  Today’s count came in at the lowest levels since mid-2021, when job openings were still in the process of surging to all-time highs.  Outright levels are still quite high, but definitely moving in the right direction as far as interest rates are concerned. 

Source: mortgagenewsdaily.com

Apache is functioning normally

It’s almost that time, when everyone resolves to do better and achieve more in the coming year. And a new survey suggests that some people may be fueling their 2024 resolutions with the financial regrets of 2023.

About two-thirds (67%) of Americans have financial regrets for 2023, according to a NerdWallet survey conducted online by The Harris Poll on Oct. 10-12. And three-fourths (75%) of that group say those regrets will lead to new resolutions in 2024.

Every year we face obstacles to our money goals. We may start out with plans to save more and spend less, but life happens. This year began with expenses taking bigger bites out of paychecks, in the form of high inflation. And as the year progressed, increasingly high interest rates added costs to credit card balances and loans, making it more expensive to borrow. Macroeconomic factors like these can be enough to derail financial goals alone, but if they’re paired with job loss, unexpected expenses or other household circumstances, they can push goals further and further out of reach.

If you have financial regrets, you’re in good company. And if your hope is to turn them into successes in 2024, plenty of other Americans have the same plan. Here’s how some of those regrets may have come about and what to expect in the year ahead.

Money regret No. 1: Not saving more

Nearly one-fourth (23%) of Americans regret not saving enough for their financial goals in 2023, according to the NerdWallet survey. And about one in five (21%) regret not saving for emergencies.

Government relief payments paired with constrained spending during COVID shutdowns to bring the personal saving rate to all-time highs in 2020 and 2021. In 2023, that rate, which measures the percentage of disposable income that can be saved, on average, settled below historic averages, making it more difficult to save for big purchases or unexpected emergencies.

In 2024: The personal saving rate, as a national average, is likely to stay on the low side. However, with inflation continuing to come down, you may find it easier to set aside funds in 2024 than you did in 2023. If you don’t have an emergency fund, start there — having a cushion set aside for unexpected expenses can insulate many of your other financial objectives. Then, set measurable and specific benchmarks — such as setting aside a certain portion of every paycheck — to get you toward your longer-term savings goals.

Money regret No. 2: Overspending

More than one in five (22%) Americans regret overspending on entertainment in 2023; 11% regret overspending on travel and 11% regret overspending on a big event (such as a wedding or party), according to the survey.

Consumer spending in 2023 has been surprisingly resilient in the face of inflation and high interest rates. This consumer resilience has been credited with keeping the economy strong when many expected a recession. But there is also evidence that this spending in the face of adversity has been achieved by busting household budgets.

In 2024: Overspending is a risk every year — it’s hard not to splurge on things like entertainment, travel and parties (we all enjoy a good time). The first step to reining in these urges, however, is setting a clear budget. Whether it’s a weekly entertainment budget or a wedding budget, setting a clear expectation for yourself beforehand can help ensure you’re not left with remorse when the dust settles.

Money regret No. 3: Mismanaging credit card debt

Equal shares of Americans (16%) regret not reducing/or paying off their credit card debt and taking on too much credit card debt in 2023, according to the survey.

Credit card debt levels fell during 2020 and early 2021, as people had excess money thanks to relief payments and student loan forbearance, for example, and were generally spending less due to COVID lockdowns. But since then, debt levels have been surpassing pre-pandemic normal. If you used your cards less in 2021 and even paid off some debt, this return to “normal” can feel especially bad.

In 2024: When your finances are in good shape, using credit cards as a tool — to earn points and cash back, for instance — can help you reach money goals more quickly. However, when you’re in debt or have to turn to a credit card to cover an emergency expense, the interest can pile up quickly and make it difficult to dig yourself out. Interest rates will likely remain high throughout 2024, so getting those balances under control is even more important. Make a concrete debt payoff plan, and if you’re struggling to make payments, consider debt relief options such as consolidation and debt management.

Lest 2023 sound like nothing more than money woes: More than three in five (62%) Americans say they achieved financial goals they set out to reach in 2023. Financial headwinds are always present in one form or another. Preparing for them and learning from mistakes may set you up for a greater chance of success in the near future.

METHODOLOGY

This survey was conducted online within the United States by The Harris Poll on behalf of NerdWallet from Oct. 10-12, 2023, among 2,096 U.S. adults ages 18 and older. The sampling precision of Harris online polls is measured by using a Bayesian credible interval. For this study, the sample data is accurate to within +/- 2.7 percentage points using a 95% confidence level. For complete survey methodology, including weighting variables and subgroup sample sizes, please contact [email protected].

Disclaimer

NerdWallet disclaims, expressly and impliedly, all warranties of any kind, including those of merchantability and fitness for a particular purpose or whether the article’s information is accurate, reliable or free of errors. Use or reliance on this information is at your own risk, and its completeness and accuracy are not guaranteed. The contents in this article should not be relied upon or associated with the future performance of NerdWallet or any of its affiliates or subsidiaries. Statements that are not historical facts are forward-looking statements that involve risks and uncertainties as indicated by words such as “believes,” “expects,” “estimates,” “may,” “will,” “should” or “anticipates” or similar expressions. These forward-looking statements may materially differ from NerdWallet’s presentation of information to analysts and its actual operational and financial results.

Source: nerdwallet.com

Apache is functioning normally

Well, another year is nearly in the books, which means it’s time to look ahead at what 2024 might have in store.

As is customary, I take a look at mortgage rate predictions from a variety of economists and offer up my own take for the upcoming year.

I also look back at the predictions for the current year to see how everyone did (hint: not well!).

The big story in 2023 was out of control inflation. The story going forward might be cooling inflation.

Though there’s also the risk it resurges, at which point mortgage interest rates could rise again.

Mortgage Rates Are Expected to Go Down in 2024

First let’s talk about the general outlook. Most expect mortgage rates to go down in 2024, which was actually the call in 2023 as well.

But guess what? Everyone was wrong. Expectations that the 30-year fixed would fall back into the 5% range were way off.

Instead, interest rates on the popular loan program surpassed the 8% mark before finally letting up over the past month.

So while many economists are optimistic for the coming year, take note that they felt the same way a year ago. And got it wrong.

But things aren’t exactly the same. The Fed increased its fed funds rate 11 times, which many believe has worked to corral inflation.

And this could lead to weak economic output and rising unemployment, which could result in Fed rate cuts as early as March 2024.

This doesn’t necessarily mean mortgage rates would follow the Fed lower, but it could signal that the worst is behind us.

As such, mortgage rates may have peaked, and it’s possible they could continue to drift lower and find a comfortable medium between their old record lows and recent near-21st century highs.

MBA 2024 Mortgage Rate Predictions

First quarter 2024: 7.1%
Second quarter 2024: 6.6%
Third quarter 2024: 6.3%
Fourth quarter 2024: 6.1%

First up is the Mortgage Bankers Association (MBA), which is often fairly bullish about mortgage rates improving.

They are, after all, fans of mortgages being originated, and lower rates equate to higher funding volume.

Last year, they predicted that the 30-year fixed would ease throughout 2023 and average 5.2% in the fourth quarter.

That didn’t work out as planned, with the 30-year fixed closer to 7% today. And it was actually above 8% just a month ago.

Still, they are predicting lower mortgage rates in 2024, just as they did last year. The difference this time around might the inflation story.

It has cooled a lot since then, which could lead to Fed rate cuts and an easing in the 10-year treasury yield, which correlates well with mortgage rates.

Ultimately, they may have expected inflation to improve faster than it did, which is why they got rates wrong in 2023.

Now that inflation actually is significantly lower, their predictions could come to fruition. Also note that their latest prediction is a full percentage point higher than it was a year ago.

They only expect the 30-year fixed to fall to 6.1% by the end of 2024 versus 5.2% when they made the same forecast a year ago.

Fannie Mae 2024 Mortgage Rate Predictions

First quarter 2024: 7.6%
Second quarter 2024: 7.4%
Third quarter 2024: 7.2%
Fourth quarter 2024: 7.1%

Next up is Fannie Mae, which purchases and securitizes conforming mortgage loans.

They are a lot less bullish than the MBA, as they expect the 30-year fixed to remain in the 7% range for all of 2024.

It’s possible they’ll update their forecast in light of recent improvements in mortgage rates.

But as it stands, they don’t expect the 30-year fixed to drop below 7.10%, which is basically where it’s at now.

So we can take this to mean they expect mortgage rates to remain relatively flat at these new, higher levels for much of 2024.

I will update their numbers if they release a new forecast before the end of 2023.

Freddie Mac 2024 Mortgage Rate Predictions

First quarter 2024: n/a
Second quarter 2024: n/a
Third quarter 2024: n/a
Fourth quarter 2024: n/a

While Freddie Mac stopped releasing a monthly outlook for mortgage rates (for reasons unknown), they still do a monthly commentary.

And from that we can glean some ideas about where they think mortgage rates will go in 2024.

Their latest outlook notes that they expect “recent volatility in Treasury yields to abate which will allow modest reductions in mortgage rates.”

How modest? Well, they said mortgage rates will probably not fall below 6% “in the short run” thanks to the higher for longer narrative.

But given the recent improvement in rates (and the 10-year bond yield), it’s possible rates could get back in the low-6s in 2024.

And if the borrower pays discount points, a rate in the 5% range is also possible, assuming those mortgage rate spreads tighten due to decreased volatility.

A year ago, they expected the 30-year fixed to fall to 6.1% by the fourth quarter of 2023. So perhaps they’re being a bit more conservative.

However, they expect home prices to rise a further 2.6% in 2024 thanks to mortgage rate lock-in effect and favorable demographics, including an elevated share of first-time home buyers.

NAR 2024 Mortgage Rate Outlook

First quarter 2024: 7.5%
Second quarter 2024: 6.9%
Third quarter 2024: 6.5%
Fourth quarter 2024: 6.3%

The National Association of Realtors (NAR) releases a monthly U.S. Economic Outlook that contains their mortgage rate predictions for the year ahead.

I’m going off their October version until I can get a more updated one, so I expect their numbers to get even more optimistic given the recent improvement in mortgage rates.

There’s even a chance they’ll throw out a number in the high-5% range for the fourth quarter of 2024.

NAR chief economist Lawrence Yun also expects the 30-year fixed to average between 6-7% by the spring home buying season.

He added that “we’ve already reached the peak in terms of interest rates.” So his expectation is it’ll get better from here. The question is how much better.

Zillow’s 2024 Mortgage Rate Prediction

Next we have Zillow. Sometimes they make mortgage rate predictions, sometimes they don’t.

Given how wrong everyone has been lately, they said, “Predicting how mortgage rates will move is a nearly impossible task…”

However, they do expect home prices to “hold steady in 2024,” declining by a negligible 0.2%.

They also believe mortgage rates may “hold fairly steady” too in coming months if recent inflation readings are any indication.

Together, the cost of buying a home could level off next year, or even drop if mortgage rates do too. But they aren’t throwing out specific numbers.

Interestingly, Zillow expects more mortgage rate locked-in homeowners to “end their holdout for lower rates and go ahead with those moves.”

So even if rates don’t get much better, the holdouts might say enough is enough and list their properties.

If rates do keep dropping, this argument becomes even more compelling. So much-needed supply could be freed up in the process.

Redfin 2024 Mortgage Rate Predictions

Meanwhile, Redfin believes mortgage rates will steadily decline throughout 2024, but remain above 6%.

Specifically, they expect the average 30-year mortgage rate to linger around 7% in the first quarter, then inch down as the year goes on.

By the end of 2024, the real estate brokerage thinks mortgage rates will fall to about 6.6% thanks in part to 2-3 rate cuts from the Fed.

Offsetting these cuts is the expectation that we will avoid a recession in 2024. So a lack of serious economic pain means more modest declines in rates as opposed to sizable ones.

Still, they see home buyers finally catching a break because home prices are also predicted to be flat.

This means monthly payments will fall further from their recent all-time highs, which we can all agree is a good thing.

Realtor 2024 Mortgage Rate Forecast

Meanwhile, the economists at Realtor.com are predicting a minimal decline in mortgage rates, but still an improvement.

They expect the 30-year fixed to average 6.8% in 2024 after averaging 6.9% in 2023. So just a 10-basis point decrease.

However, they do expect rates to finish off 2024 at 6.5%, which is a little more optimistic.

It’s also markedly better than the 2023 year-end expectation of 7.4%. And would essentially take us back to the end of 2022, when the 30-year fixed averaged 6.42%.

In other words, we might be able to forget 2023 ever happened. But we still won’t be able to revisit early 2022 anytime soon.

At that time, the 30-year fixed was a mindboggling 3.22%.

The Truth’s 2024 Mortgage Rate Predictions

First quarter 2024: 6.875%
Second quarter 2024: 6.625%
Third quarter 2024: 6.25%
Fourth quarter 2024: 5.875%

Like everyone else, I was wrong about mortgage rates in 2023. I thought they’d slowly move lower throughout the year before ending the year around 5%.

Instead, we are closer to 7% today, which is a pretty big miss. That being said, what I assumed would play out last year (lower inflation), seems to be happening now.

There are also several rate cuts now expected in 2024, with the CME FedWatch Tool favoring a 4% – 4.25% range for the federal funds rate by December 2024.

The 10-year bond yield is also expected to moderate further, and could be back to the mid-3% range.

If we assume that mortgage rate spreads also tighten from their current levels near 300 bps to something more reasonable, such as 200 bps, we could see noticeably lower mortgage rates in 2024.

Taken together, a spread of 200 bps and a 3.5% 10-year yield could signal a return to mid-5% mortgage rates.

That might sound a little too good to be true, so I’ll err on the side of caution and go for an average rate as low as 5.875% to end the year.

Remember, there are still a lot of unknowns and potential curveballs ahead. We’ve got multiple geopolitical events that are still unfolding.

And potentially the most contentious U.S. presidential election in history. So as always, mortgage rates will ebb and flow, and opportunities will present themselves.

There will be good months and bad months, but I expect mortgage rates to continue trending lower as 2024 unfolds.

(photo: Marco Verch, CC)

Source: thetruthaboutmortgage.com

Apache is functioning normally

You’ve probably heard of the mortgage rate lock-in effect, where homeowners are unwilling (or unable) to give up their ultra-low mortgage rates.

Also known as golden handcuffs, these low rates have arguably prevented many existing homeowners from moving, and certainly from refinancing.

But now one bank may hold the key to unlocking some of these borrowers with their so-called “split-the-difference” mortgage rate program.

As the name suggests, they’ll give you a mortgage rate in between your old rate and prevailing market rates if you apply for a new home loan.

This could lessen the blow of moving at a time when home prices remain near all-time highs and mortgage rates also hover close to 21st century highs.

Would You Be Willing to Move If Mortgage Rates Were a Little Bit Lower?

Glenville, New York-based TrustCo Bank has come up with a novel concept to get homeowners moving again, literally.

They’re offering below-market mortgage rates to existing home loan customers when they move into a new home.

The catch is that they have to pay off their old home loan, which likely carries a significantly lower interest rate.

The idea here is that the bank can get rid of a low-yielding mortgage while simultaneously giving their customer a more palatable mortgage rate in an 8% mortgage rate world.

It’s arguably a win-win situation for both bank and borrower, assuming the homeowner wants to move elsewhere.

The program works for TrustCo Bank because they’re a portfolio lender, meaning the loans they underwrite stay on their books after closing.

This contrasts the many nonbank lenders out there that originate loans and quickly sell them off to third-party investors.

And as you might suspect, banks holding billions in super-low-rate mortgages likely want to get rid of them as quickly as they can, as opposed to holding them to term.

So if they can give homeowners a little nudge, it could solve any duration mismatch the bank might be dealing with, where they’re lending cheap while bond yields skyrocket.

How the Split the Difference Mortgage Rate Program Works

As noted, you have to be an existing TrustCo Bank mortgage customer who is purchasing a new owner-occupied home to live in.

Let’s pretend you received your home loan from the bank a couple years ago when the 30-year fixed was averaging 3%.

You love your low rate, but you aren’t thrilled about your property. Or you simply want to move for one reason to another.

Enter the “Split-the-Difference” program, which considers your current rate, today’s rates, and gives you something in the middle.

To calculate this rate, first they subtract your rate (e.g. 3%) from prevailing market rates. We’ll call that rate 7.50%.

That gives us a difference of 4.50%, which is then divided by two to determine the split figure amount, or 2.25%.

This number is then added to your existing mortgage rate (3% + 2.25%) to come up with a split-the-difference rate of 5.25%.

If the rate happens to be an odd amount, it will be rounded to the nearest quarter percent. Unclear if that’s rounded both up and down though.

Regardless, as you can see a mortgage rate of 5.25% would be significantly better than a rate of 7.50%.

Is This a Good Deal for Existing Homeowners?

$500k Loan Amount Standard Rate
 Split-the-Difference
Interest Rate 7.50% 5.25%
Monthly Payment $3,496.07 $2,761.02
Monthly Savings n/a $735
Savings @ 60 months n/a $44,000
Balance @ 60 months $473,087.41 $460,747.39

On a mortgage with a $500,000 loan amount, we’d be talking about monthly savings of roughly $735.

Over a five-year period, that’s $44,000, and it would result in a lower outstanding balance due to the reduced interest expense.

Of course, you’d be giving up your old 3% mortgage in the process. But if you truly wanted/needed to move, it could be a favorable option versus other alternatives.

Still, you need to shop around to see what other banks could offer and you’d need to take a look at the closing costs involved.

One could also look into an adjustable-rate mortgage, assuming rates were similar/better and the closing costs lower.

But if you’re already a TrustCo mortgage customer, it’d be at least worth entertaining a rate quote to determine the potential savings.

As noted, they’re a portfolio lender that keeps the loans its originates. Don’t expect your average bank or mortgage lender to offer the same program.

Most mortgage companies don’t service their own loans, and thus do not have an interest in getting the old loan paid off ahead of schedule.

You’ve got to hand it to TrustCo though for getting creative at a time when mortgages have become a tough sell.

The bank primarily operates in the states of New York and Florida, with each state accounting for about half of total home loan production.

They funded nearly $1 billion in home loans last year, per HMDA data.

Source: thetruthaboutmortgage.com

Apache is functioning normally

Apache is functioning normally

Millions of Social Security recipients will get a 3.2% increase in their benefits in 2024, far less than this year’s historic boost and reflecting moderating consumer prices.

The cost-of-living adjustment, or COLA, means the average recipient will receive more than $50 more every month beginning in January, the Social Security Administration said Thursday. The AARP estimated that increase at $59 per month.

“This will help millions of people keep up with expenses,” said Kilolo Kijakazi, Social Security’s acting commissioner.

Thursday’s announcement follows this year’s 8.7% benefit increase, brought on by record 40-year-high inflation, which pushed up the price of consumer goods. With inflation easing, the next annual increase is markedly smaller.

Mortgage rates up again

Home loan borrowing costs rose for the fifth straight week, keeping the average long-term U.S. mortgage rate at its highest level in more than two decades and taking another bite out of prospective homebuyers’ purchasing power.

The average rate on the benchmark 30-year home loan rose to 7.57% from 7.49% last week, mortgage buyer Freddie Mac said Thursday. A year ago, the rate averaged 6.92%.

Borrowing costs on 15-year fixed-rate mortgages, popular with homeowners refinancing their home loan, also increased. The average rate rose to 6.89% from 6.78% last week. A year ago, it averaged 6.09%, Freddie Mac said.

The elevated rates combined with a near-historic low level of homes for sale nationally has worsened homebuyers’ affordability crunch by keeping home prices near all-time highs even as sales of previously occupied U.S. homes have fallen 21% through the first eight months of this year versus the same stretch in 2022.

Source: bostonherald.com

Apache is functioning normally

Apache is functioning normally

If you don’t believe mortgage rates and home prices can fall together, just look at what home prices have done in the face of 7% mortgage rates.

Despite the 30-year fixed surging from sub-3% levels to near-8% levels in less than two years, home prices hit fresh all-time highs.

So why is it so difficult to imagine the opposite scenario, where both interest rates and property values fall in tandem?

It seems the human mind wants there to be an inverse relationship between rates and prices when there often is not.

The good news is it’s possible that both rates and prices moderate from here, ushering in a better level of housing affordability.

Home Prices and Mortgage Rates Don’t Have Much of a Relationship

The Urban Institute wrote an article last year about the relationship between home prices and interest rates when mortgage rates were rapidly ascending.

They noted that since 1976, there has been “a positive but weak relationship” between the two.

In other words, higher mortgage rates are often accompanied by higher home price appreciation, though this tendency isn’t robust.

Still, it defies the logic many housing bears and everyday humans possess, where they assume higher mortgage rates must equate to lower home prices.

After all, if it becomes more expensive to purchase a home, the price must come down. That’s their argument at least.

But when you look at other necessary items (shelter also being a necessity), people don’t stop buying them because the cost goes up.

And one also needs to consider why mortgage interest rates are high to begin with. Often, interest rates are high because the economy is running hot.

This means there are more consumers out there making more money, which ostensibly means more of them can afford to buy expensive houses.

One other factor to consider is all-cash buyers – a large percentage of home buyers forgo mortgages to get the deal done, especially investors.

So while higher interest rates might affect the average home buyer, they don’t affect everyone.

Home Prices and Inflation Have a Strong Positive Relationship

While higher mortgage rates and home price appreciation have a weak, but still positive relationship, inflation and home price appreciation have a strong one.

That is to say that a higher rate of inflation is associated with higher home price appreciation.

And this association is significantly stronger than the relationship between mortgage rates and home prices.

Inflation has been front and center for the past couple years, and the Fed has been actively fighting it via 11 fed funds rate hikes since early 2022.

At the same time, home prices haven’t fallen, though the rate of appreciation has. Still, when you consider the 30-year fixed more than doubling in such a short time span, you’d expect housing market carnage.

Instead, we’ve seen home prices hit new all-time highs. Last week, the FHFA reported that home prices were up 0.8% in July from a month earlier, and up 4.6% year-over-year.

While that might sound too good to be true, consider that high interest rates are often correlated with periods of strong economic growth, low unemployment, rising wages, and high inflation.

Put another way, when the economy is hot, home prices tend to rise because more people have money and jobs to support mortgage payments, even if they grow larger.

This means housing demand can increase or at least remain steady, even if affordability erodes over time.

Housing Affordability at Its Worst Since 1984

Of course, affordability has worsened significantly of late because both rates and prices have continued to rise, pushing the national payment-to-income ratio to its highest level since 1984.

Per Black Knight, it takes a $2,423 principal and interest payment to purchase the median-priced home with 20% down and a 30-year fixed mortgage.

This is up 91% from $1,155 just two years ago, when the Fed ended Quantitative Easing (QE) and began their campaign known as Quantitative Tightening (QT).

Clearly this has slowed home price appreciation, which had been running at a double-digit clip. But as noted, prices keep on rising.

Nominal Home Prices Are Sticky and Rarely Fall

The Urban Institute noted that mortgage rates have mostly just declined since 1976.

There have only been a few periods when rates increased more than 1.5 percentage points year-over-year.

However, rates did rise rapidly from September 1979 to March 1982 (remember those 1980s mortgage rates) and from September 1994 to February 1995.

This caused the rate of home price appreciation to slow quickly, similar to what we saw lately.

During that 1979 to 1982 mortgage rate rise, home price appreciation decelerated from 12.9% to just 1.1%.

And from September 1994 to February 1995, it slowed from 3.2% to 2.6%.

During each of these time periods, real home price appreciation (adjusted for inflation) went negative, but nominal home prices only went negative once a recession was under way.

In other words, you need the economy to fall apart if you want home prices to come down. And guess what could also come down at the same time?

What About Falling Home Prices Combined with Lower Mortgage Rates?

So we’ve discussed how home prices and mortgage rates can rise together, though the relationship isn’t a strong one.

But that a robust economy tends to lift home prices higher, as has been the case over the past many years.

If that’s true, can’t the opposite also be correct? Can’t mortgage rates and home prices fall at the same time, perhaps because of disinflation and a cooling economy?

The answer is yes they can. If and when the economy takes a turn for the worse, the Fed could pivot and begin cutting its own policy rate.

At the same time, mortgage rates could retreat from recent highs and make their way lower as well.

And home prices could also begin to fall as a recession sets in, resulting in job losses, pay cuts, higher unemployment, and lower housing demand.

This counters the notion that mortgage rates back in the 4-5% would set off another housing market frenzy filled with bidding wars and rapidly appreciating prices.

Simply put, if home prices and mortgage rates can rise together, they can also fall together.

Ideally, we see moderation on both fronts, with home prices maybe pulling back from recent highs, at least on a real, inflation-adjusted basis, while mortgage rates also ease.

This could help to tackle the affordability issues currently plaguing the housing market.

Just remember though that the other big problem is supply. There simply aren’t enough homes for sale, and as we all know, scarcity leads to higher prices.

Source: thetruthaboutmortgage.com