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Housing Market Caught in a Trap of High Prices, Expensive Mortgages and Low Inventory - CNBC
High costs, low inventory indicate the market could be in for a cooldown this fall.
By Tim Smart
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These are tough times for the housing market. A lack of inventory and high mortgage rates have combined to rob homeowners of the incentive to sell their houses at near-record prices while would-be buyers are scared off by sticker shock and the prospect of paying off the loan.
On Thursday, Freddie Mac’s weekly mortgage report found that even though rates on a 30-year loan ticked down a notch to 7.12%, it was still the fourth consecutive week of 7% or higher rates. Meanwhile on Wednesday, the Mortgage Bankers Association said mortgage applications have plunged 28% since last year and are now at the lowest level since late 1996.
The National Association of Home Builders said last month that its August survey of builder sentiment had fallen 6 points to 50 out of 100 following seven months of rising confidence levels. The index measuring traffic of prospective buyers also fell 6 points to 34.
“Rates should continue to come down from their peaks earlier this summer, but high home prices and growing affordability challenges are taking a toll on more prospective home buyers,” said Lisa Sturtevant, chief economist at Bright MLS. “At the same time, the balance between renting and owning in many markets has shifted toward renting as more new apartment construction comes online.”
Sturtevant added that something else may be at work in the current market.
“There is also the fatigue factor. After two years of a pandemic-fueled housing market frenzy and another year of rising rates and tight inventory, consumers are weary. Even if rates dip down to below 7% in the coming weeks, that is not going to stave off a market cooldown this fall.”
“Mortgage applications declined to the lowest level since December 1996, despite a drop in mortgage rates,” said Joel Kan, deputy chief economist at the Mortgage Bankers Association. “Both purchase and refinance applications fell, with the purchase index hitting a 28-year low, as prospective buyers remain on the sidelines due to low housing inventory and elevated mortgage rates.”
More unmarried couples are buying homes together. What to know before you do. More couples are becoming homeowners before tying the knot.
Unmarried couples make up 18% of all first-time homebuyers, up from just 4% in 1985, according to a 2022 report by the National Association of Realtors.
The organization mailed out a survey in July 2022 and received a total of 4,854 responses from homebuyers who bought a primary residence between July 2021 and June 2022.
‘Housing affordability really is a struggle’
Many young, unmarried couples live together, often for financial reasons. About 3 in 5 unmarried couples in the U.S. live with their partners, according to a report by the Thriving Center of Psychology. Splitting the cost of housing, which can be a big part of your budget, makes sense.
Even so, unlike married homebuyers, almost half of unmarried ones — 46% — made financial sacrifices, including picking up secondary jobs, to finance their purchase, the NAR report found.
“Housing affordability really is a struggle, so pulling your finances together as an unmarried couple can make a lot of sense to move forward on that transaction,” said Lautz, who is also the deputy chief economist of NAR.
The typical unmarried couple buying a home together for the first time was roughly 32-year-old millennials with a combined average household income of $72,500, according to Lautz. Additionally, these shoppers were more likely than married couples to receive loans — 4% versus 3% — or be gifted money from friends and family — 12% versus 7%.
One reason unmarried people may decide to buy homes with their partners is the strength in numbers that pairing up offers when it comes to qualifying for financing, as real estate prices and interest rates remain high, said Melissa Cohn, regional vice president of William Raveis Mortgage in New York.
How to secure each other’s investment
“In order to walk away from a marriage, you have to get divorced, so there’s more staying power,” Cohn said. “If you’re an unmarried couple, you have no legal obligation to that other party.”
However, it is counterintuitive for just about anyone to stop making mortgage payments — because it will ruin their credit, she added.
To protect their investments in the property, unmarried couples ought to carefully consider how it is titled. That helps lay out each partner’s legal rights and ownership, as well as what happens to the home if one of them dies.
Talk to an attorney about your options. Those options might include titling the property as joint tenancy with rights of survivorship, if ownership is equal, or as tenancy in common if one partner is contributing more financially.
Couples might also consider using a limited liability corporation or other entity, Cohn suggested. “By taking title in an entity like an LLC or partnership, you can better spell out and define who’s responsible for what portion,” she said.
They can also protect their share of investments by outlining them in a property agreement. It defines who’s responsible for the mortgage, how much each person is putting into the down payment, who’s paying for the insurance and home repairs, added Cohn.
This may be a good idea if one person has a higher income than the other, she added.
House-rich’ Americans are sitting on nearly $30 trillion in home equity. Here’s how to tap it.
Thanks to skyrocketing housing prices, homeowners are now sitting on nearly $30 trillion in home equity, according to the St. Louis Federal Reserve — just shy of the 2022 peak.
That’s roughly $200,000 cash per homeowner in equity that can be tapped, which is the amount most lenders will allow you to take out while still leaving 20% equity in the home as a cushion.
How to tap your home for cash
Up until last year, taking cash out by refinancing was a popular way to access the equity you’ve accumulated in your home. With mortgage rates currently over 7%, that’s suddenly a lot less appealing.
Even with high rates of home equity, borrowers are more likely to take out a second loan to pull cash out, rather than lose their low rate through a cash-out refi
Otherwise, a home equity line of credit, also known as a HELOC, lets you borrow money against a portion of your home’s equity. Instead of taking out a home loan at a fixed amount, a HELOC is a revolving line of credit, but with better rates than a credit card, that you can use when you want to, or just have on hand.
Last year, originations of home equity loans and HELOCs increased 50% compared with two years earlier, according to the Mortgage Bankers Association, or MBA.
“Given the nearly $30 trillion of accumulated equity in real estate, there is untapped potential for home equity lending for lenders and borrowers,” said Marina Walsh, MBA’s vice president of industry analysis.
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