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San Diego Housing Market Update // Week of August 21st, 2023
KEY POINTS
The average rate on the popular 30-year fixed mortgage hit 7.48%, according to Mortgage News Daily.
The average on the 30-year fixed last year at this time was around 5.5%.
Mortgage rates jumped Monday, following a rise in bond yields driven by investors’ concerns that high interest rates and inflation will linger longer than expected.
The average rate on the popular 30-year fixed mortgage hit 7.48%, the highest level since November 2000, according to Mortgage News Daily. It has risen 29 basis points in just the past week.
“Investors just aren’t seeing the kind of deterioration in economic data that they expected,” said Matthew Graham, chief operating officer of Mortgage News Daily.
He noted that the Federal Reserve wants to see the same deterioration before considering a policy shift, and that shift would likely favor short-term rates first.
Higher mortgage rates exacerbate the supply situation. Current homeowners are reluctant to list their homes for sale because the vast majority of them have rates around or below 3%. To move to another home would mean more than doubling that rate. It has created what is now being called “golden handcuffs” among potential sellers.
For a buyer today, the difference in affordability from just a year ago is dramatic. The average on the 30-year fixed last year at this time was around 5.5%. For someone buying a $400,000 home, with 20% down on a 30-year fixed loan, the monthly payment today, with principal and interest, is roughly $420 more than it would have been a year ago.
More borrowers are now opting for adjustable-rate loans, which offer lower interest rates for shorter fixed terms. The average rate on a 5-year ARM last week was 6.2%, according to the Mortgage Bankers Association. The ARM share of applications rose to 7%. In 2020, when the 30-year fixed was setting multiple record lows, that share was less than 2%.
The nation’s homebuilders have been trying to offset higher mortgage rates by either buying down those rates for short or long terms, or by lowering home prices. They had slowed those incentives earlier this year, as demand surged and rates fell back, but they recently ramped them up again.
Housing Market Forecast for August 2023
Housing market activity remains weak overall thanks to high mortgage rates, elevated home prices and constrained housing inventory—a trifecta of headwinds perpetuating the housing affordability crisis. At the same time, high inflation and more interest rate hikes still hang in the air.
The Fed revealed new terminal rate projections in June that suggest the rate will reach 5.6% by the end of 2023, implying at least one more rate increase in 2023. Consequently, many experts believe mortgage rates will remain above 6% for the remainder of this year.
Some Experts Foresee Sluggish Housing Market Recovery
Although weekly averages for 30-year mortgage rates are down from their fall 2022 peak, if the ongoing oscillation between 6.5% and 7% continues—or rates break through 7% again—it’s hard to imagine housing market conditions significantly improving anytime soon, especially if the Fed continues with rate hikes.
Mortgage originations amounted to only $344 billion in the first quarter of 2023, their lowest total since the second quarter of 2014, according to a Freddie Mac report. Housing experts expect originations will remain muted through the rest of 2023. In addition, existing-home sales were down a whopping 18.9% from the year before, per NAR.
“I expect the number of homes for sale to decline this year and continue to be a damper on home sales,” said Danielle Hale, chief economist at Realtor.com, in an emailed statement. “Limited inventory is also keeping prices high even though housing affordability has deteriorated significantly in the past three years.”
On the other hand, some experts are choosing to flip the script and focus on the signs indicating that the market is entering a new phase.
“The recovery has not taken place, but the housing recession is over,” said Lawrence Yun, chief economist at NAR.
Despite this optimistic take, Yun acknowledges that home prices will remain high due to demand outpacing housing supply and that more inventory will prove critical to providing greater access and affordability for aspiring home buyers.
Housing Inventory Outlook for August 2023 - repost from FORBES.com
Low housing inventory has been a challenge since the 2008 housing crash when the construction of new homes plummeted. It still hasn’t fully recovered—and won’t in 2023.
Housing supply remains at near historic lows—especially entry-level supply—consequently propping up demand and sustaining higher home prices.
Even so, new single-family homes have been coming to the rescue—at least to some extent—enticing eager shoppers frustrated by the limited resale inventory. Moreover, the price gap between the median existing-home sales price and new home sales price has closed markedly in recent months, another incentive luring home seekers.
Nonetheless, new home sales took a small hit between May and June as mortgage rates sailed past the 6.5% mark. Sales dipped 2.5% to 697,000 new single-family homes selling in June compared to 715,000 in May. The median sales price for a new home was $415,400, according to the U.S. Census Bureau and the U.S. Department of Housing and Urban Development (HUD).
“With low existing home inventory, new home inventory is becoming competitive, and new homes are now competitive on price,” said Robert Frick, corporate economist with Navy Federal Credit Union, in an emailed statement. “The premium for a median-priced new house versus an existing house is now only $5,000.
In October 2022, the median sales price for a new home was $496,800, while the median existing-home sales price was $378,800—a difference of $118,000. This gap has since narrowed by roughly 96%.
Inventory of unsold, existing homes was unchanged between May and June, shackling existing inventory to a paltry 3.1-month supply at the current sales pace. Existing inventory has remained stalled at record lows for months. Many experts say a balanced housing market has four to six months of inventory.
“Inventory is approximately 46% below the historical average dating back to 1999,” says Jack Macdowell, chief investment officer and co-founder at Palisades Group. “We think that it is highly unlikely that the inventory problem will be resolved in 2023,” Macdowell says.
The country ultimately needs 4.3 million more homes, according to a Zillow analysis.
“There are simply not enough homes for millions of people,” said Orphe Divounguy, senior economist at Zillow, in a press release. “Unless we address the shortage of smaller, more affordable, starter-type homes, we risk leaving families without a seat—and it will only get worse over time.”
Affordability Struggles Sideline Hopeful Home Buyers
Despite signs that home prices are beginning to weaken in some regions, the country is contending with a housing affordability crisis thanks to a meager housing supply, persistently high mortgage rates and sales prices that have steadily resumed their climb since February.
The median existing-home sales price jumped from $396,100 to $410,200 in June, the second-highest price ever recorded and only 0.9% below the high of $413,800 a year ago, according to NAR.
Even as inflation cools, those hoping to buy a home continue to feel the effects of pandemic-fueled home price appreciation coupled with elevated interest rates.
Will the Housing Market Crash in 2023?
Even with elevated interest rates, home prices continued their steady climb, for the most part, between March and May, according to the latest S&P CoreLogic Case-Shiller Home Price Index.
The U.S. National Home Price non-seasonally adjusted (NSA) index reported marginal month-over-month and year-over-year decreases. However, stark differences existed at the regional level, with the best-performing cities coming as a surprise, especially as they beat out normally top-ranked cities such as Las Vegas, Phoenix, Tampa and Miami.
Despite some areas seeing price declines, experts point out that today’s homeowners stand on much more secure footing than those coming out of the 2008 financial crisis, with many borrowers having positive equity in their homes. Consequently, the likelihood of a housing market crash is low.
“Homeowner equity is at the highest level it’s been in the past several decades, so homeowners have a lot of value in their home,” says Nicole Bachaud, an economist at Zillow.
Tips for Buying in Today’s Housing Market
Even as prices soften, you may realize that the area where you want to buy a home is still out of reach, so it’s important to be flexible. Also, get all your ducks in a row in advance—review your financial situation, gather required documents, shop multiple lenders and strengthen your credit score. That way, when you find your dream home, you’ll be in a better position to act fast in a tight market.
Getting to know a local realtor where you’re hoping to buy can also potentially give you a crucial edge in a tight housing market.
“Find out what your options are with a reputable, experienced agent,” experts say. “A lack of inventory means buyers should expect plenty of competition, especially in more affordable areas and for more affordable houses. However, if you’re a first-time homebuyer you should be especially careful when choosing an agent.
“With the market’s shift, you want to hire an expert who’s been there before, has a pulse on all the changes happening in your desired neighborhood and works well with your loan officer.”
Trying to predict what might happen this year is not the best home buying strategy. “Buyers sitting on the sidelines today in anticipation of lower prices tomorrow may end up disappointed,” says Neda Navab, president of the U.S. region at Compass, a real estate tech company.
“The housing market—like so many other markets—is almost impossible to time,“ says Divounguy. “The best time for prospective buyers is when they find a home that they like, that meets their family’s current and foreseeable needs and that they can afford.”
Tips for Selling in Today’s Housing Market
“Sellers should make sure to work with an agent in order to get their pricing right,” Divounguy, senior economist at Zillow says.
Divounguy adds that homes that are priced right are the ones that get the competition while others linger on the market.
He also advises sellers to take steps sooner rather than later to get their houses ready to sell.
“The top regret we hear from sellers year after year is that they wish they started prepping their home for sale sooner,” Divounguy says. “And don’t neglect your online curb appeal.”
