This video is the latest in our Monday with Matthew series with Windermere Chief Economist Matthew Gardner. Each month, he analyzes the most up-to-date U.S. housing data to keep you well-informed about what’s going on in the real estate market.
Hello there, I’m Windermere’s Chief Economist Matthew Gardner and welcome to this month’s episode of Monday with Matthew. Today we are going to take a look at the new home market where headwinds are certainly growing. And the reason this particular subject piqued my interest was that the National Association of Home Builders just released their Housing Market Index for August, and the numbers were certainly eye-opening.
Now, for those of you who may not be particularly familiar with this index, it is based on a survey of home builders which asks them to give their opinions on the single-family home market and asks them to rate current market conditions for the sale of homes today as well as in six months’ time. It also asks their opinion regarding foot traffic of prospective buyers to their new home communities.
NAHB Housing Market Index
And as you can see, the headline index level fell six points to 49. The drop in August marked the eighth consecutive monthly decline for the Housing Market Index. It was also notable because it was the first time since May of 2020 that the index has dropped below the key 50 breakeven level. This is significant, as it tells us that today more home builders currently rate sales conditions as poor than good.
Now, while the August number was certainly lower than some economists had forecast, I was actually not too surprised as builders have been reporting a spike in cancelled contracts recently. In fact, a report I just read that was put out by John Burns Consulting suggested that the cancellations have more than doubled since April with 17.6% of buyers pulling out of their purchases in July. That compares to 8% in April and 7 ½% a year ago.
Housing Market Index Components
This chart shows a breakdown of three components of the Housing Market Index which are all at their lowest levels since May of 2020, which was just before housing activity rebounded following the lockdown due to COVID-19.
The present sales index fell seven points to 57 but is still above the breakeven point
The future sales series fell two points to 47
Prospective buyer traffic fell five points to 32 which, if we exclude the pandemic, represents the lowest index level since April of 2014
I find this index has a very strong correlation with new home sales, but I also use it as a pretty reliable leading indicator when it comes to single-family housing starts. I’ll get to that shortly. The survey also stated that one in five builders had reduced prices in August. That might help to explain the 10-point spread between builders’ perception of current versus future sales. But there are limits on home builders’ ability to keep cutting prices in order to support sales. This has become a significant issue because many of them are currently holding a large stock of inventory.
New Homes for Sale
Here is what current inventory levels look like. Although you might think that it’s not that bad given that only 9% of available homes are finished are ready to move into, I would tell you that builders incur costs every day that a home is not sold, even if that home has yet to be built. And with inventory at a level not seen since 2008, I’m sure there are a lot of builders not sleeping too well right now.
I would add that by the time the above video is released, the July new home sales report will have been published. I can almost guarantee that the number of homes for sale will have grown further.
New Home Sales
Higher inventory levels are due to slower sales activity, which is continuing to decline. Sales are 17% lower than a year ago. With more homes for sale and lower transactions, it would now take more than nine months to absorb all available homes using the current sales pace. I would also tell you that the last time months of supply broke above nine was all the way back in 2010.
It’s my forecast that sales in July will have dropped from the annualized rate of 590,000 shown in the chart above to somewhere between 570,000 and 580,000.
U.S. Single-Family Housing Starts
With high supply levels and lower sales, it’s not at all surprising to see builders hitting the brakes, with new home starts falling by 10.1% between June and July of this year. Starts are down by 18 ½% from a year ago. Starts have dropped on a sequential basis for five consecutive months now, and I am afraid that they will drop further before finding a bottom.
So, what’s the bottom line here? Well, there are several issues I see, the first of which is affordability. Home prices have been spiraling upward since the start of the pandemic not only because mortgage rates dropped, but construction costs started jumping and builders had to charge more for a home.
Builders saw prices rise by almost 18% last year. This had already taken a significant toll on affordability even before the mortgage rates spike we saw earlier this year. The upshot, as I see it, is that tighter monetary policy from the Fed, in concert with construction costs that remain well above normal levels, has hit builders and hit them hard. Of course, they are doing their best to address the situation by slowing construction activity significantly, but I think that they are going to have a pretty rough time for the next several months.
Ultimately, I see little option for home builders other than lowering prices further, especially now that they are competing with rising inventories in the resale market. I also believe that there are buyers out there waiting patiently on the sidelines for prices to drop in the coming months as they know that builders at some point have to solve the current supply demand imbalance and lowering prices is the easiest way of doing this. Last month the average price drop was 5%, but this is very likely to increase as we move toward the fall.
Will builders get through the situation they find themselves in? I believe that they will. And there are some glimmers of light out there with inflation appearing to be peaking, interest rates are, if not dropping, then certainly stabilizing, and this will help.
Builders also understand that the country has a significant housing shortage. In fact, a recent report published by “Up For Growth” suggested that we have a housing shortage today of around 3.8 million homes. Although this includes rental and ownership housing, some basic math tells me that there is a need today for around 2.5 million new owner-occupied homes. So, light is definitely at the end of the tunnel, but there is a way to go before they get out of it.
And there you have it. I hope that you’ve found my thoughts on this topic of interest. As always, if you have any questions or comments about the current new home environment, please do reach out to me. In the meantime, stay safe out there and I look forward to visiting with you all again next month.
Bye now.
About Matthew Gardner
As Chief Economist for Windermere Real Estate, Matthew Gardner is responsible for analyzing and interpreting economic data and its impact on the real estate market on both a local and national level. Matthew has over 30 years of professional experience both in the U.S. and U.K.
In addition to his day-to-day responsibilities, Matthew sits on the Washington State Governors Council of Economic Advisors; chairs the Board of Trustees at the Washington Center for Real Estate Research at the University of Washington; and is an Advisory Board Member at the Runstad Center for Real Estate Studies at the University of Washington where he also lectures in real estate economics.
This blog entry was originally published on windermere.com
not reflect all real estate activity in the market.
2022 Western Washington Real Estate Market Update | Q2
by Matthew Gardner
The following analysis of select counties of the Western Washington real estate market is provided by Windermere Real Estate Chief Economist Matthew Gardner. We hope that this information may assist you with making better-informed real estate decisions. For further information about the housing market in your area, please don’t hesitate to contact your Windermere Real Estate agent.
The most recent employment data (from May) showed that all but 2,800 of the jobs lost during the pandemic have been recovered. More than eight of the counties contained in this report show employment levels higher than they were before COVID-19 hit. The regional unemployment rate fell to 4.5% from 5.2% in March, with total unemployment back to pre-pandemic levels. For the time being, the local economy appears to be in pretty good shape. Though some are suggesting we are about to enter a recession, I am not seeing it in the numbers given rising employment and solid income growth.
Western Washington Home Sales
❱ In the second quarter of 2022, 23,005 homes sold, representing a drop of 11% from the same period a year ago, but up by a significant 52% from the first quarter of this year.
❱ Sales rose in Grays Harbor County compared to a year ago but fell across the balance of the region. The spring market, however, was very robust, likely due to growing inventory levels and buyers trying to get ahead of rising mortgage rates.
❱ Second quarter growth in listing activity was palpable: 175% more homes were listed than during the first quarter and 61.98% more than a year ago.
❱ Pending sales outpaced listings by a factor of 3:1. This is down from the prior year but only because of the additional supply that came to market.
Western Washington Home Prices
❱ Even in the face of rising mortgage rates, home prices continue to rise at a well-above-average pace, with average prices up 13.3% year over year to $830,941.
❱ I have been watching list prices as they are a leading indicator of the health of the housing market. Thus far, despite rising mortgage rates and inventory levels, sellers remain confident. This is reflected in rising median list prices in all but three counties compared to the previous quarter. They were lower in San Juan, Island, and Jefferson counties.
❱ Prices rose by double digits in all but four counties. Snohomish, Grays Harbor, Mason, and Thurston counties saw significant growth.
❱ List prices and supply are both trending higher, but this has yet to slow price growth significantly. I believe we will see the pace of appreciation start to slow, but not yet.
Mortgage Rates
Although mortgage rates did drop in June, the quarterly trend was still moving higher. Inflation—the bane of bonds and, therefore, mortgage rates—has yet to slow, which is putting upward pressure on financing costs.
That said, there are some signs that inflation is starting to soften and if this starts to show in upcoming Consumer Price Index numbers then rates will likely find a ceiling. I am hopeful this will be the case at some point in the third quarter, which is reflected in my forecast.
Western Washington Days on Market
❱ It took an average of 16 days for a home to go pending in the second quarter of the year. This was 2 fewer days than in the same quarter of 2021, and 9 fewer days than in the first quarter.
❱ Snohomish, King, and Pierce counties were, again, the tightest markets in Western Washington, with homes taking an average of between 8 and 10 days to sell. Compared to a year ago, average market time dropped the most in San Juan County, where it took 26 fewer days for a seller to find a buyer.
❱ All but six counties saw average time on market drop from the same period a year ago. The markets where it took longer to sell a home saw the length of time increase only marginally.
❱ Compared to the first quarter of this year, average market time fell across the board. Demand remains very strong.
Conclusions
This speedometer reflects the state of the region’s real estate market using housing inventory, price gains, home sales, interest rates, and larger economic factors.
The economy remains buoyant, which is an important factor when it comes to the regional housing market, particularly as it affects buyers. Even though the number of homes that came to market has jumped significantly, which should favor those looking for a new home, demand is still robust, and the market remains competitive.
Much to the disappointment of buyers, rising listing prices suggest that sellers are clearly still confident even as financing costs continue to increase. While the pace of price growth is slowing, sellers are still generally in control. As such, I have moved the needle a little more in the direction of sellers. Until we see list-price growth and home sales slow significantly, we will not reach a balanced market.
About Matthew Gardner
As Chief Economist for Windermere Real Estate, Matthew Gardner is responsible for analyzing and interpreting economic data and its impact on the real estate market on both a local and national level. Matthew has over 30 years of professional experience both in the U.S. and U.K.
In addition to his day-to-day responsibilities, Matthew sits on the Washington State Governors Council of Economic Advisors; chairs the Board of Trustees at the Washington Center for Real Estate Research at the University of Washington; and is an Advisory Board Member at the Runstad Center for Real Estate Studies at the University of Washington where he also lectures in real estate economics.
This blog entry was originally published on windermere.com
The Landscape for Mortgage Rates and Inflation in 2022
by Matthew Gardner
This video is the latest in our Monday with Matthew series with Windermere Chief Economist Matthew Gardner. Each month, he analyzes the most up-to-date U.S. housing data to keep you well-informed about what’s going on in the real estate market.
Hello there, I’m Windermere’s Chief Economist Matthew Gardner and welcome to this month’s episode of Monday with Matthew. You know, one of the many things I love about being an economist is that it is a remarkably humbling profession. You see, just when we start to believe that our models are close to perfection, something comes along to remind us that forecasting isn’t an exact science.
And if you’re wondering what I am talking about, I recently took a look at the 2022 mortgage rate forecast I put out at the start of the year and…well, let’s say that rates rose at a far faster pace than I had anticipated. I thought that now would be a good time to take another look at rates and share my thoughts on the direction that they will likely take during the rest of the year and my reasoning behind it. And that means we need to talk about inflation.
30-Year Conventional Mortgage Rates: 2018 – 2022
So, a quick look back. As you can see, there wasn’t much to celebrate in 2018, with rates rising from 3.95% to 4.94% before pulling back and ending the year at around 4.5%. In 2019, rates fell following the Feds’ announcement that they were likely done with raising the Fed Funds Rate, and the mortgage market also reacted positively to the announcement from the White House that they were going to impose tariffs on select Chinese imported goods. We saw an uptick in late summer, but that was mainly due to news related to BREXIT.
In 2020, rates were dropping but spiked very briefly when COVID-19 shut the country down and bond markets panicked. But with the Fed jumping in with an emergency rate cut and announcing that they would start buying a significant number of treasuries and mortgage-backed securities, rates tumbled to an all-time low of just 2.66%. In 2021, rates rose as new COVID infections plummeted, but then dropped again as the Delta variant took hold, but ultimately trended modestly higher in the second half of the year.
And then we get to 2022. Rates started the year at just over 3.1% but have since skyrocketed to over 5.8% before a small pullback that started a few weeks ago. In as much as economists expected rates to rise this year, nobody anticipated how fast they would rise. So, what went wrong? Well, there’s actually a rather simple answer.
Even though we expected rates to trend higher in 2022, there were two things we hadn’t built into our forecast models.
Russia’s invasion of the Ukraine
Inflation continued to climb for far longer than we expected
So, how do things look for the rest of the year? To explain my thinking, it’s important to remember that the bond market and, by implication, mortgage rates hate nothing more than high inflation because when inflation is running hot, it limits demand for bonds which, in turn, forces the interest rate payable on bonds to rise and this pushes mortgage rates higher.
But what’s been fascinating to watch is that over the past couple of weeks, rates have actually been dropping which is certainly counterintuitive given where inflation is today. And the only reason I can see for this is that bond traders were thinking that inflation might be topping out.
But then we got the June CPI numbers, and it certainly didn’t suggest that inflation was slowing, in fact it showed the opposite. But even though the total inflation rate hasn’t yet peaked, I believe that a shift has actually started and that we are closer to a peak in inflation than you may think.
Indicators of Inflation: Consumer Spending
The June CPI report showed the headline inflation rate still trending higher but look at the core rate which excludes the volatile food & energy sectors. That has actually been pulling back for the past three months. And consumer spending when adjusted for inflation fell 0.4% in May. That’s the first monthly drop since last December, and I expect the June number when it comes out at the end of the month to show spending dropping even further.
This is a very important dataset that often gets overlooked but it is starting to tell me that the economy is slowing because of inflation and slower spending acts as a headwind to further price increases.
The core PCE price index is up 4.7% year-over-year, but this was the smallest annual increase since last November and you can see that it is also starting to roll over. This index is actually the Fed’s favored measure of inflation as it’s more comprehensive that the CPI number as it measures the change in spending for all consumers, not just urban households.
Indicators of Inflation: 5-Year Breakevens and Producer Price Index
The five-year “inflation breakeven” has plunged more than a full percentage point since peaking at just under 3.6% in late March. And this number is important as it lets us know where bond traders expect the average inflation rate to be over the next five years.
The Producer Price Index measures inflation at the wholesale, not retail, level and even though the total rate rose as energy costs continue to impact the manufacturing sector, the core rate has been pulling back for the past three months. Now let’s look at some commodity prices and see what’s going on there.
The price for natural gas is down over 34% from its recent high
Copper prices are down 26% from the recent June peak and down substantially from March
Soybean prices are down 10%
Despite the war in Ukraine, wheat prices are down 27% from June
Retail Gas Prices: West Coast, West Coast Excluding CA, U.S.
It appears as if gas prices have also rolled over. Of course, here on the West Coast it’s more expensive than the nation even when you take California out of the equation.
U.S. Treasury Yields: 10-Year and 2-Year Constant
And finally, to cap things off, traders must also be pondering the same numbers as I am because bond yields themselves have been tumbling at both the long and short ends of the yield curve with the 10-year note still yielding less than 3% even after the CPI report and two-year yields, while still elevated, are still down from 2.42% just two weeks ago.
So, given all the charts we have looked at, I hope that you too are seeing some light at the end of the tunnel when it comes to the likelihood that inflation is about to start easing.
No doubt, the headline inflation number for June wasn’t one that anyone wanted to see but, if the trends we have looked at continue, I still expect inflation to start slowly creeping lower, which will push bond prices higher, yields will start to pause—if not drop—and that will allow mortgage rates to hold at or close to their current levels for the time being. Although we could see rates coming down, though they will still start with a five for the foreseeable future. I hope that you have found my thoughts of interest.
As always, if you have any questions or comments about this particular topic, please do reach out to me but, in the meantime, stay safe out there. I look forward to visiting with you all again next month.
Bye now.
About Matthew Gardner
As Chief Economist for Windermere Real Estate, Matthew Gardner is responsible for analyzing and interpreting economic data and its impact on the real estate market on both a local and national level. Matthew has over 30 years of professional experience both in the U.S. and U.K.
In addition to his day-to-day responsibilities, Matthew sits on the Washington State Governors Council of Economic Advisors; chairs the Board of Trustees at the Washington Center for Real Estate Research at the University of Washington; and is an Advisory Board Member at the Runstad Center for Real Estate Studies at the University of Washington where he also lectures in real estate economics.
This blog entry was originally published on windermere.com
not reflect all real estate activity in the market.
The Growing Housing Affordability Problem
by Matthew Gardner
This video is the latest in our Monday with Matthew series with Windermere Chief Economist Matthew Gardner. Each month, he analyzes the most up-to-date U.S. housing data to keep you well-informed about what’s going on in the real estate market.
Hello there, I’m Windermere’s Chief Economist Matthew Gardner and welcome to this month’s episode of Monday with Matthew.
If you’ve listened to me at all over the past several years, you’ll know that I am pretty passionate about one subject: housing affordability. And, given the significant price growth that we’ve seen over the past decade, as well as the recent spike in mortgage rates, I wanted to talk a little bit about what might be done to address this very serious issue.
The Growing Housing Affordability Problem
Now, when we think about housing affordability and how it might be solved, a lot of people get tied up in the minutiae when, quite frankly, it really isn’t that hard a problem to solve. You see, there’s one very simple way to address this: to build more housing units. But, as easy as that may sound, there are a lot of obstacles that are holding new supply back. But before I get to that, I want to share some data with you that might help to demonstrate how serious an issue we all face.
Every quarter, the National Association of Homebuilders puts out its affordability numbers for metro areas across the country. An analysis of sales and incomes allows them to show the number of homes—both new and existing—sold in a quarter that were affordable to households making median income.
Housing is Increasingly Unaffordable
Here you will see numbers from just a few of the 240 metropolitan areas across the country and the share of sales in the first quarter of this year that were “technically” affordable. I think you’ll agree that it’s eye opening.
Although I am only showing you a few of the U.S. markets I will tell you that the ten least affordable US housing markets were all in California. The Golden State is also home to 21 of the top 25 least affordable markets in the country. But what you might also find interesting is that our primary cities aren’t the only ones that are suffering from affordability issues, with markets like Bend, Oregon; Boise, Idaho; and even Las Vegas, Nevada becoming increasingly unaffordable for a lot of households.
And it’s worth mentioning that that 48 of the 69 markets where less than half of the homes sold were affordable were in states that have at some point in the past implemented comprehensive planning and growth management legislation. And when governments mandate where homes can and cannot be built, one thing happens: it pushes land prices higher which makes new homes more expensive and limits the amount of new supply that builders are able to provide. So, what can be done?
Well, I will start out by saying that states who have implemented growth management plans, which they generally did to slow or stop suburban sprawl, remain disinclined to move these boundaries, and that means it becomes paramount to not look further out but to concentrate within the urban growth boundaries and decide whether it’s time to think about removing single-family zoning altogether.
This is a fascinating thought, but I must add that I am not suggesting that we do away with single-family homes. Absolutely not! What I am thinking about is the ability for a market to decide what makes the most sense. In order to do so, single-family zones need to allow for the development of denser housing, but also allow the market to decide what’s best. Areas that have implemented such change has given rise to a movement in order to address what is being referred to as “missing middle housing.” For those of you who are unfamiliar with this term let me try and explain.
Missing Middle Housing
This is a great image courtesy of Opticos, a team of urban designers, architects, and strategists who are passionate about adding sorely needed housing options.
They came up with the term “missing middle” as it describes housing types that were actually very common prior to World War II where duplexes, row-homes, and courtyard apartments were in high demand. Unfortunately, however, they are now far less common and, therefore, “missing.”
And the key function of this type of housing is to meet the rising demand for walkable neighborhoods, respond to changing demographics, and provide housing at different price points. You see, rather than focusing on the number of units in a structure—think high rise apartments or condominiums—this type of housing emphasizes scale and heights that are appropriate for and sympathetic to single-family or transitional neighborhoods.
The Decline of Missing Middle Housing Construction
And to show you how supply of these types of units has changed, this chart shows the number of duplexes to eight-unit buildings built over the past almost half-century and you can clearly see that up until the late 1980s they were being built in decent numbers, but the 1990s saw a significant shift toward traditional single-family home ownership and builders followed the demand and this type of product started to become scarcer.
Almost 16% of total new homes built in America in the early 1980s were of this style, but that number has now shrunk to just 1.4%—or a paltry 19,000 units.
But I see demand for these housing types growing as we move forward and that buyers or renters, young and old, will be attracted as it will meet their requirements not only in regards to the type of home they would want to live in but, more importantly, it can be built cheaper than traditional single-family housing and therefore it will be more affordable.
But although this sounds like it’s a remarkably simple solution that can solve all our woes, in reality it’s not that easy for two very specific reasons. The first is that many markets are already essentially built out, meaning that in order to develop this type of product, a builder would have to purchase a number of existing homes and raze them in order to rebuild. But given current home values, it’s very hard for a builder to be able to make such a proposal financially.
And the second issue is that current residents within these “transition” areas—which have been developed as traditional single-family neighborhood—simply don’t want to see change. But is this type of product bad? Here are some examples.
This shows row-homes in Brooklyn on the left and traditional “triple-deckers” in Massachusetts on the right:
This is a bungalow court project in California:
Here are some Live/Work Units in Colorado:
These are some amazing mews homes in Utah:
And finally, a new terrace housing project that will be built in Washington DC:
Don’t get me wrong, I’m sure that some of you who simply aren’t inspired by this type of architecture, and that is understandable. But can we simply stick with the status-quo? I don’t think so. And some state legislators have already implemented significant zoning amendments in order to try and encourage this type of development.
Back in 2018, Minneapolis was the first city to allow this type of development inside single-family zoned areas. This was followed by Oregon State in 2019. Senate Bill 9 was signed by Governor Newsom of California last year which made it legal for property owners to subdivide lots into two parcels and turn single-family homes into duplexes, effectively legalizing fourplexes on land previously reserved for single-family homes. So, we are starting to see some change.
This is a good start but as I mentioned earlier in areas that are already built out, even this type of forward-thinking legislation will not be the panacea that some want. But I’m not giving up hope.
Addressing the “missing middle housing” would allow for homes of all shapes and sizes, for people of all incomes including workers who are essential to our economy and community. Here I am talking about our teachers, firefighters, administrative assistants, childcare providers, and nurses—just to name a few!
There are currently 45 million Americans aged between 25 and 34 and most aspire to homeownership. However, the massive price growth which, by the way, many of us have benefitted from over the past several years, has simply put a “starter home” out of their reach.
I will leave you with one last statistic. Over 28% of American households today are made up of a single people living alone, and it is anticipated that up to 85% of all U.S. households will not include children by the year 2025. Finally, by 2030, one in five Americans will be over the age of 65.
Are we going to meet the needs of the country’s changing demographic going forward? I certainly hope so, but it will take a lot of work for us to get there. As always, if you have any questions or comments about this particular topic, please do reach out to me but, in the meantime, stay safe out there and I look forward to visiting with you all again next month.
Bye now.
This blog entry was originally published on windermere.com
Moving Patterns for U.S. Homeowners and Renters in 2021
by Matthew Gardner
This video is the latest in our Monday with Matthew series with Windermere Chief Economist Matthew Gardner. Each month, he analyzes the most up-to-date U.S. housing data to keep you well-informed about what’s going on in the real estate market.
Hello there. I’m Windermere Real Estate’s Chief Economist Matthew Gardner and welcome to the latest episode of Monday with Matthew. Over the past few months, analysts like myself have been starting to get our hands on early numbers from the Census Bureau and, although we won’t get the bulk of the data for another several months, I thought it would be interesting to take a quick look at some of the information that the government has put out specifically as it relates to patterns.
This is a relevant topic given the pandemic, with many people wondering if we saw a mass shift in where we choose to live because of COVID-19. This belief that we packed up and moved because of the pandemic is, at face value, quite credible, especially given that home sales in 2021 were at levels we haven’t seen since 2006. But the reality, at least from the data we have received so far, actually tells a different story.
Moving Patterns for U.S. Homeowners and Renters in 2021
We Move More Infrequently
This first chart looks at people and not households and it shows that, contrary to popular belief, we’re actually moving less frequently now then we have done in decades, with the share of people not moving in a single year rising from just about 84% to over 91½%. Of course, we are having fewer children now than we did, but not to the degree that would change the trend.
Unsurprisingly, Renters Move More Often than Owners
And when we break this down between homeowners and renters there is quite the discrepancy between the two groups. Although the number of renters not moving has risen from 67½ percent up to 84% since 2000, the number of homeowners staying put has moved from almost 91% all the way up to 95% last year.
So, the data thus far is not suggesting that we saw any form of mass exodus following the pandemic, in fact we haven’t been moving as much for the past 2-decades, but people did move since COVID-19 hit and the reasons they did were fascinating. The following charts are broken up into four categories of movers: those who moved for family reasons; those who moved for employment related reasons; those that moved for housing related reasons; and finally, those that moved for other reasons.
Reasons to Move (1)
So, starting with family-related reasons, it was not surprising to see the major reason for both owners and renters to move was to establish a new household, nor was it surprising to see a greater share of renters headed out on their own than homeowners. Finally, the share of those moving because of a change in marital status was essentially the same between renters and homeowners. And when we look at employment related reasons for people moving last year, a greater share of renters moved because of a new job than homeowners, and more renters moved to be closer to their workplaces than did homeowners. Again, not really surprising, given that a large share of renters work in service-based industries and therefore proximity to their workplaces is important. You will also see that a greater share of homeowners than renters moved because they lost their jobs and, finally—and not at all surprisingly—far more homeowners moved because they chose to retire than renters.
Reasons to Move (2)
And when we look at housing related reasons that people moved, a large share of owners and renters moved from their current home or apartment and into a new, bigger, better house or apartment. A statistically significant share looked to move into a better neighborhood, and I do wonder whether owners were doing this because of the ability to work from home and possibly move to a better location further away from their workplaces. And even though renters tend to stay closer to their workplaces, I wonder whether these renters weren’t in white-collar industries and that the ability to work from home has led them to move into an area that they perceive to be better suited to them.
And finally, a significant share of renters moved because of the fact that rents have been skyrocketing over the past 18-months or so. This clearly impacted some homeowners, too. And finally, under the “other” category, more renters than owners moved because they were either entering or exiting a relationship with a domestic partner, and more renters left to either go to college or because they had completed their degrees.
Health-related reasons for moving had a significant impact on homeowners over renters, and I found it particularly interesting to see a lot of owners saying that “climate” was a reason for their move. Of course, I can only hypothesize as to whether people are simply looking to move to warmer climates or whether climate change is starting to have an increasingly large influence on where we choose to live. My gut tells me that climate change is becoming a far more important consideration for homeowners, although we can’t deny that a lot of people, specifically on the East Coast, moved South during the pandemic.
These next few charts break down movers not just by whether they our owners or renters but also by ethnicity.
2021 Mobility by Ethnicity & Tenure: Owners vs Renters Movers and Non-Movers
Here you can see that homeowners across these three ethnicities were pretty much uniform in their desire to stay in their existing home with only 4 to 5% moving. And renters who, as we have already seen, did move more frequently last year than homeowners, were also in a very tight range at between 83 and 85%.
2021 Mobility by Ethnicity & Tenure: Owners vs Renters Movers and Non-Movers (2)
And the same can be said about Hispanic owners and mixed race families, with about 95% not moving last year. Now this is modestly lower than White, Black, or Asian households, but the difference is very marginal. As for renters, between 83 and almost 88% of them within these three ethnicities moved last year, but you will see a bigger share of Hispanic renters stayed put as opposed to all the other ethnicities shown here.
2021 Mobility by Ethnicity & Tenure: Moves In & Out of State
Looking closer now at those who did move, even though fewer Asian households moved when compared to all other ethnicities, far more left the state than stayed, and the same was true for Asian renters with over a quarter moving out of state.
2021 Mobility by Ethnicity & Tenure: Moves In & Out of State (2)
Again, a greater share of the Hispanic homeowners who did move last year stayed in the state where their old house was, and the share of mixed households was roughly at the average for all ethnicities. And the share of Hispanic and mixed-race renters who stayed in State was also about average.
What I see from the data is that the huge shift that many expected during COVID has not been affirmed—at least not by the numbers we have looked at. That said, we are sure to see numerous revisions because of the issues that COVID 19 has posed on Census takers, so we may get a different story as more data is released and revisions posted. What I found to be most interesting in the numbers we have looked at was the massive increase in renters moving in with their “significant others.” But I am not surprised, given that there are around 48½ million people aged between 20 and 30, and this is their time!
And I was also interested in the share of the population who moved due to climate. I will be doing some more digging around in the darkest recesses of the Census Bureau website to see if I can find out more about this. Although I can’t confirm it, my gut tells me that climate—and specifically climate change—will be a factor of growing importance when people are thinking about where they want to live.
And there you have it. As always, if you have any questions or comments about this particular topic, please do reach out to me but, in the meantime, stay safe out there and I look forward to visiting with you all again next month.
Bye now.
Blog Entry Originally Found on Windermere.com HERE
The Effects of Today's Mortgage Rates on Your Home Purchase
It's vital to understand the relationship between mortgage rates and your purchasing power if you're going to buy a property. The amount of housing you can afford to buy within your financial means is referred to as purchasing power. Mortgage rates have a direct impact on the monthly payment you'll make on your new house. As a result, as interest rates climb, so does the monthly payment you can lock in on your home loan. That could limit your future purchasing power in a rising-rate climate like the one we're in now.
The average 30-year fixed mortgage rate is currently around 5%, and analysts predict that it will rise in the coming months. If you buy now, before the increase affects your purchasing power, you can get ahead of the game.
Mortgage Rates Have a Significant Impact on Your Purchasing Power.
The graph below shows the overall link between mortgage rates and a common monthly mortgage payment for various loan amounts. Let's say your finances allow for a $2,100-$2,200 monthly mortgage payment. The green in the graph represent a payment that is within that range, while the red represents a payment that is outside of that range (see graph below):
As the graph demonstrates, unless you pursue a smaller home loan amount, you're more likely to surpass your desired payment range as mortgage rates rise. If you're ready to buy a home, use this as encouragement to do it now, before interest rates rise and you have to decide whether or not to reduce the amount you borrow to keep inside your budget.
Consult with a Trusted Adviser to Understand Your Budget and Develop a Strategy
When looking for a property, it's vital to keep your budget in mind. The easiest way to express it is as follows,
Get preapproved with today's rates, but also think about what would happen if rates rose another quarter of a point,... Know what that would mean for your monthly bills and how comfortable you are with it so that if rates do rise, you'll already know how to adjust.
Whatever the case may be, the ideal method is to collaborate with your real estate agent and a reputable lender to develop a strategy that takes rising mortgage rates into account. Together, you may examine your budget in light of current rates and devise a strategy for adjusting when rates change.
In Conclusion
Even minor increases in mortgage rates can have an effect on your purchasing power. If you're in the market for a home, having a solid plan is more important than ever. Work with a trusted real estate advisor and lender to plan your strategy for achieving your dream of homeownership this spring.
Q1 2022 Western Washington Real Estate Market Update
The following analysis of select counties of the Western Washington real estate market is provided by Windermere Real Estate Chief Economist Matthew Gardner. We hope that this information may assist you with making better-informed real estate decisions. For further information about the housing market in your area, please don’t hesitate to contact your Windermere Real Estate agent.
Regional Economic Overview
The post-COVID job recovery continues. Though data showed the number of jobs dropped in January, February saw gains that almost offset the jobs lost the prior month. As of February (March data is not yet available), the region had recovered all but 47,000 of the more than 300,000 jobs lost due to the pandemic. Of note is that employment levels in Grays Harbor, Thurston, San Juan, and Clallam counties are now above their pre-pandemic levels. In February, the regional unemployment rate rose to 4.1% from 3.7% in December. Although this may be disconcerting, an improving economy has led more unemployed persons to start looking for a job, which has pushed the jobless rate higher. I expect the regional economy to continue expanding as we move into the spring and summer, with a full job recovery not far away.
Western Washington Home Sales
❱ In the first quarter of 2022, 15,134 homes sold, representing a drop of 5.8% from the same period a year ago, and down 31.7% from the fourth quarter.
❱ Yet again, supply-side constraints limited sales. Every county except Snohomish showed lower inventory levels than a year ago.
❱ Sales grew in five counties across the region but were lower across the balance of the counties contained in this report. Compared to the fourth quarter, sales were lower across all market areas.
❱ The ratio of pending sales (demand) to active listings (supply) showed pending sales outpacing listings by a factor of 6.7. Clearly, the significant jump in mortgage rates in the first quarter has not yet impacted demand. Rather it appears to have stimulated buyers partly due to FOMO (Fear of Missing Out)!
Western Washington Home Prices
❱ Although financing costs have jumped, this has yet to prove to be an obstacle to buyers, as prices rose 16.4% year-over-year to an average of $738,152. Naturally, there is a lag between rates rising and any impact on market prices. It will be interesting to see what, if any, effect this has in the next quarter’s report.
❱ Compared to the same period a year ago, price growth was again strongest in San Juan County, but all markets saw prices rising more than 10% from a year ago.
❱ Relative to the final quarter of 2021, all but Kitsap (-2.7%), Mason (-1.5%), Skagit (-1.8%), Jefferson (-6.3%), and Clallam (-0.1%) counties saw home prices rise.
❱ The market remains supply starved. While increases in “new” listings suggest that more choice is coming to market, it remains insufficient to meet demand.
Mortgage Rates
Average rates for a 30-year conforming mortgage were 3.11% at the end of 2021, but since then have jumped over 1.5%—the largest increase since 1987. The surge in rates is because the market is anticipating a seven- to eight-point increase from the Federal Reserve later this year.
Because the mortgage market has priced this into the rates they are offering today, my forecast suggests that we are getting close to a ceiling in rates, and it is my belief that they will rise modestly in the second quarter before stabilizing for the balance of the year.
Western Washington Days on Market
❱ It took an average of 25 days for a home to go pending in the first quarter of 2022. This was 4 fewer days than in the same quarter of 2020, but 2 days more than in the fourth quarter of 2021.
❱ Snohomish, King, and Pierce counties were the tightest markets in Western Washington, with homes taking an average of 11 to 15 days to sell. The greatest drop in market time compared to a year ago was in San Juan County, where it took 23 fewer days for homes to sell.
❱ All but five counties saw average time on market drop from the same period a year ago, but the markets where it took longer to sell a home saw the length of time increase only marginally.
❱ Quarter over quarter, market time dropped in Snohomish, King, and Pierce counties. Jefferson and Clallam counties also saw modest improvement. In the balance of the region the length of time a home was on the market rose, but seasonality undoubtedly played a part.
Conclusions
This speedometer reflects the state of the region’s real estate market using housing inventory, price gains, home sales, interest rates, and larger economic factors.
The numbers have yet to indicate that demand is waning amid rising interest rates, but this is sure to become a greater factor as we move into the spring. A leading indicator I pay attention to is changes to list prices and, in most counties, these continue to increase. This suggests that sellers remain confident they will be able to find a buyer even in the face of higher borrowing costs. If this pace of increase starts to soften, it may be an indication of an inflection point, but it does not appear to be that way yet.
Given all the factors discussed above, I have decided to leave the needle in the same position as the last quarter. The market still heavily favors sellers, but if rates rise much further, headwinds will likely increase.
About Matthew Gardner
As Chief Economist for Windermere Real Estate, Matthew Gardner is responsible for analyzing and interpreting economic data and its impact on the real estate market on both a local and national level. Matthew has over 30 years of professional experience both in the U.S. and U.K.
In addition to his day-to-day responsibilities, Matthew sits on the Washington State Governors Council of Economic Advisors; chairs the Board of Trustees at the Washington Center for Real Estate Research at the University of Washington; and is an Advisory Board Member at the Runstad Center for Real Estate Studies at the University of Washington where he also lectures in real estate economics.
This video is the latest in our Monday with Matthew series with Windermere Chief Economist Matthew Gardner. Each month, he analyzes the most up-to-date U.S. housing data to keep you well-informed about what’s going on in the real estate market.
Hello there, I’m Windermere’s Chief Economist Matthew Gardner, and welcome to this month’s episode of Monday with Matthew. With home prices continuing to defy gravity, mortgage rates spiking, the Fed raising interest rates significantly, a yield curve that is just keeping its nose above water, and some becoming vocal about the possibility that we are going to enter a recession sooner rather than later, it’s not at all surprising that many of you have been asking me whether the housing market is going to pull back significantly, and a few of you have asked whether we aren’t in some sort of “bubble” again.
Because this topic appears to be giving many of you heartburn, I decided that it’s a good time to reflect on where the housing market is today and give you my thoughts on the impact of rising mortgage rates on what has been an historically hot market.
The Current State of the U.S. Housing Market
Home Sale Prices
As usual, a little perspective. Between 1990 and the pre-bubble peak in 2006, home prices rose by 142%, which was a pretty impressive annual increase of 5.6% over a 16 1/2-year period. When the market crashed, prices dropped by 33%, but from the 2012 low to today, prices have risen by 131%, or at an even faster annual rate of 8.6% over a shorter period of time—10 years.
You may think that prices rising at an annual rate that exceeds the pace seen before the market crash is what has some brokers and home buyers concerned, but that really isn’t what has many people scared. It’s this.
Mortgage Rates in 2022
At the start of 2022, the average 30-year fixed mortgage rate was just a little above 3%. But, over a brief 15-week period, they have skyrocketed to 5%. This has led some to worry that the market is about to implode. Of course, nobody can say that the run-up in home prices hasn’t been phenomenal over the past few years, and it’s certainly human nature to think that “what goes up, must come down,” but is there really any reason to panic? I think not, and to explain my reasoning, let’s look back in time to periods when rates rose significantly and see how increasing mortgage rates impacted the marketplace.
Housing and Mortgage Markets During Times of Rising Rates
This table shows seven periods over the past 30 years when mortgage rates rose significantly. On average, rates trended higher for just over a year before pulling back, and the average increase was 1.4%. But now look at how it impacted home prices: it really didn’t. On average, during these periods of rising financing costs, home prices still rose by just over 5%. Clearly, not what some might have expected. But there were some negatives from mortgage rates trending higher, and these came in the form of lower sales in all but one period and new housing starts also pulled back.
So, if history is any indicator, the impact of the current jump in mortgage rates is likely to be seen in the form of lower transactions rather than lower prices. And this makes sense. Although rising financing costs puts additional pressure on housing affordability, what people don’t appear to think about is that mortgage rates actually tend to rise during periods of economic prosperity. And what does a flourishing economy bring? That’s right. Rising wages. Increasing incomes can certainly offset at least some of the impacts of rising mortgage rates.
Static Equilibrium Analysis – 1/3
To try and explain this, I’m using the median US sale price in February of this year, assuming a 20% down payment and the mortgage rate of 4%. And you can see that the monthly P&I payment would be $1,365. But as mortgage rates rise, and if buyers wanted to keep the same monthly payment, then they would have to buy a cheaper home. Using a rate of 5%, a buyer could afford a home that was 9% cheaper if they wanted to keep the payment the same as it would have been if rates were still at 4%.
But, as I mentioned earlier, an expanding economy brings higher wages, and this is being felt today more than usual, given the worker shortage that exists and businesses having to raise compensation. Average weekly wages have risen by over five-and-a-half percent over the past year—well above the pre-pandemic average of two-and-a-half percent. Although increasing incomes would not totally offset rising mortgage rates, it does have an impact.
Static Equilibrium Analysis – 2/3
To demonstrate this, let’s use the U.S. average household income of $70,611. Assuming that they’ve put aside 20% of their gross income for a down payment, they could afford a home priced just under $360,000 if mortgage rates were at 4%. As rates rise—and assuming that their income doesn’t—their buying power is reduced by over 10%, or just over $38,000.
Static Equilibrium Analysis – 3/3
But if we believe that incomes will rise, then the picture looks very different. Assuming wages rise by 6%, their buying power drops by just 5% if rates rose from 4% to 5%, or a bit less than $19,000.
Although rates have risen dramatically in a short period, because they started from an historic low, the overall impacts are not yet very significant. If history is any indicator, mortgage rates increasing are likely to have a more significant impact on sales, but a far smaller impact on prices.
But there are other factors that come into play, too. Here I’m talking about demand. The only time since 1968 that home prices have dropped on an annualized basis was in 2007 through 2009 and in 2011, and this was due to a massive increase in the supply of homes for sale. When supply exceeds demand, prices drop.
So, how is it different this time around? Well, we know that the supply glut that we saw starting to build in mid-2006 was mainly not just because households were getting mortgages that, quite frankly, they should never have gotten in the first place, but a very large share held adjustable rate mortgages which, when the fixed interest rate floated, they found themselves faced with payments that they could not afford. Many homeowners either listed their homes for sale or simply walked away.
Although it’s true that over the past two or so months more buyers have started taking ARMs as rates rose, it’s not only a far smaller share than we saw before the bubble burst, but down payments and credit quality remained far higher than we saw back then.
So, if we aren’t faced with a surge of inventory, I simply don’t see any reason why the market will see prices pull back significantly. But even if we do see listing activity increase, I still anticipate that there will be more than enough demand from would-be buyers. I say this for several reasons, the first of which is inflation.
What a lot of people aren’t talking about is the proven fact that owning real estate is a significant hedge against rising inflation. You see, most buyers have a mortgage, and a vast majority use fixed-rate financing. This is the hedge because even as consumer prices are rising, a homeowner’s monthly payments aren’t. They remain static and, more than that, their monthly payments actually become lower over time as the value of the dollar diminishes. Simply put, the value of a dollar in—let’s say 2025—will be lower than the value of a dollar today.
But this isn’t the only reason that inflation can actually stimulate the housing market. Home prices historically have grown at a faster pace than inflation.
Hedge Against Inflation
This chart looks at the annual change in total CPI going back to 1969. Now let’s overlay the annual change in median U.S. home prices over the same time period. Other than when home prices crashed with the bursting of the housing bubble, for more than fifty years home price growth has outpaced inflation. And this means we are offsetting high consumer prices because home values are increasing at an even faster rate.
But inflation has additional impacts on buyers. Now I’m talking about savings. As we all know, the interest paid on savings today is pretty abysmal. In fact, the best money market accounts I could find were offering interest rates between 0.5% and 0.7%. And given that this is significantly below the rate of inflation, it means that dollars saved continue to be worth less and less over time while inflation remains hot.
Now, rather than watching their money drop in value because of rising prices, it’s natural that households would look to put their cash to work by investing in assets where the return is above the rate of inflation—meaning that their money is no longer losing value—and where better place to put it than into a home.
Housing as a Hedge Against Inflation
So, the bottom line here is that inflation supports demand from home buyers because:
Most are borrowing at a fixed rate that will not be impacted by rising inflation
Monthly payments are fixed, and these payments going forward become lower as incomes rise, unlike renters out there who continue to see their monthly housing costs increase
With inflation at a level not seen since the early 1980s, borrowers facing 5% mortgage rates are still getting an amazing deal. In fact, by my calculations, mortgage rates would have to break above 7% to significantly slow demand, which I find highly unlikely, and
If history holds true, home price appreciation will continue to outpace inflation
Demand appears to still be robust, and supply remains anemic. Although off the all-time low inventory levels we saw in January, the number of homes for sale in March was the lowest of any March since record keeping began in the early 1980’s.
But even though I’m not worried about the impact of rates rising on the market in general, I do worry about first-time buyers. These are households who have never seen mortgage rates above 5% and they just don’t know how to deal with it! Remember that the last time the 30-year fixed averaged more than 5% for a month was back in March of 2010!
And given the fact that these young would-be home buyers have not benefited from rising home prices as existing homeowners have, as well as the fact that they are faced with soaring rents, making it harder for them to save up for a down payment on their first home, many are in a rather tight spot and it’s likely that rising rates will lower their share of the market.
So, the bottom line as far as I am concerned is that mortgage rates normalizing should not lead you to feel any sort of panic, and that current rates are highly unlikely to be the cause of a market correction.
And I will leave you with this one thought. If you agree with me that a systemic drop in home prices has to be caused by a significant increase in supply, and that buyers who are currently taking out adjustable-rate mortgages are more qualified, and therefore able to manage to refinance their homes when rates do revert at some point in the future, then what will cause listings to rise to a point that can negatively impact prices?
It’s true that a significant increase in new home development might cause this, but that is unlikely. And as far as existing owners are concerned, I worry far more about a prolonged lack of inventory. I say this for one very simple reason and that is because a vast majority off homeowners either purchased when mortgage rates were at or near their historic lows, or they refinanced their current homes when rates dropped.
And this could be the biggest problem for the market. Even if rates don’t rise at all from current levels, I question how many owners would think about selling if they were to lose the historically low mortgage rates that they have locked into. It is quite possible that for this one reason, we may experience a tight housing market for several more years.
As always, if you have any questions or comments about this particular topic, please do reach out to me but, in the meantime, stay safe out there and I look forward to visiting with you all again next month.
Bye now.
This blog entry was originally posted on Windermere.com and can be viewed HERE
