Bringing Clarity to the Biggest Questions in Housing Today

Welcome to your Monthly Market Report for November of 2022.

In this months feature article we’re going to give you the latest update on mortgage rates and prices, something we are following very closely in today’s housing market. We’re also going to bring you the latest on foreclosures. It’s a big question that people have right now around foreclosures and what that looks like in this country. We’re going to wrap by answering or helping you answer the question, should I buy a home right now? A lot of clients and buyers are asking, is this a good time to buy a home? And while everyone moves through that process at a different pace for different reasons, we want to help you answer that question.  

And the big questionis....... will mortgage rates keep rising? So let’s start with a graph that shows mortgage rates are rising this year. This is the Freddie Mac 30-year fixed rate from January of 2022, from the beginning of the year, through where we are today. This is released at the time of this writing, right in the beginning of November. What we can see, is mortgage rates have been climbing drastically this year. This is what we’ve all been feeling. Look at that steep incline. And they even ticked up over 7% over the past couple of weeks. And that’s causing the cool down in the market. That is causing people to pause their plan, say, Hey, I’m not really sure that I want to buy right now.

Some people are being priced out of the market. Mortgage rates have actually more than doubled in this year. That has never happened before in a calendar year. The pain that people are feeling is because they’re rising so fast. It’s not necessarily just about that 7% number that we’re starting to see them tick around. It’s about the rapid rise.  I think this quote from Freddie Mac really says it well. It says, “U.S. 30-year fixed mortgage rates have increased 3.83 percentage points since the end of last year. That’s the biggest year-to-date increase in over 50 years.”

It's certainly making people press pause. It’s making them question their plans. Take a look at this quote from George Ratiu from realtor.com. It says, “With inflation still running at a 40-year high and the Fed expecting a few more rate increases to combat it, mortgage rates will experience upward pressure through the end of 2022.”

So why is that? Because the Federal Reserve is making moves to raise the federal funds rate. They’re trying to lower inflation. They’re trying to slow down the economy. While inflation is high, mortgage rates are going to remain high. So we’re seeing that expected upward pressure through the end of the year.

Mark Fleming from First American says, “While mortgage rates are expected to continue to drift higher over the coming months, much of the rapid increase in rates is likely behind us.”

So we’re not talking about mortgage rates doubling again. Mortgage rates are feeling that pressure. The Fed is making active moves to lower inflation. Mortgage rates respond. We’re still seeing high mortgage rates. But we’re not expected to see this exponential increase as we continue to go forward. So as we start to see the Fed making moves to lower inflation, to really kind of get this under control and to see what’s happening in the economy around us, the question starts to come into play, what about a recession? 

Is there a recession around the corner? This data from the Wall Street Journal is really helpful. It is a survey where The Wall Street Journal asked economists, what are the chances of a recession happening in the next 12 months?

You can see in January of 2022, about 18% of economists said, you know what, I think we’re going to see a recession over the next 12 months. Well, as inflation has stayed high, we’ve seen economic pressures in the world around us. We’ve seen the housing market change. The percentage of economists who are expecting a recession over the next 12 months has continued to increase. The latest data released in October shows that 63% of economists feel that there’s going to be a recession sometime over the next 12 months. This is reflective of where we’ve seen the economy go over the past year.

It starts to spark the question, what does that mean for the housing market? As we look at the housing market, there’s a lot we can learn from history. Let’s keep in mind that a recession does not mean falling prices. Okay?

In four out of the last six recessions in this country, home prices actually increased. We all remember the housing crash in 2008,  I think that’s fresh in our minds and people are fearful of that. But what we have to remember is we have a very different landscape right now when it comes to inventory, when it comes to lending standards, equity. All of the factors that are driving the housing market in a different direction.

What this graph does not mean is that we won’t have falling prices. But it does mean that it doesn’t happen every time. So when we think about what happens in the housing market, if a recession is in play, we have to put this context together. One thing we can also learn about what history tells us, is that a recession more likely means falling mortgage rates. Because in those same six recessions, mortgage rates have dropped each time this country has seen a recession. 

What experts are saying about home prices?  We’ve seen mortgage rates rising and that is easing the fury and the frenzy that we’ve seen in the housing market.

But what does that mean for prices? Let’s take a look at this quote from Redfin. It says, “For those bearish folks eagerly awaiting the home price crash, you’ll have to keep waiting. As much as demand is pulling back, supply is as well. And that’s reducing downward pressure on prices in the short run.”

So what does this mean? This means houses are staying on the market longer. We’re not seeing an influx of new listing. It is still a seller’s market. We know that prices are driven by supply and demand. This is continuing to put upward pressure on home prices. However, it’s also giving more opportunities for buyers. So we’re seeing that shift in the market. 

What you can see in the graph below is that some experts are projecting a little bit of appreciation next year. That’s what you see in those blue bars, anywhere from 0.7% to 2.6% appreciation.

Other experts are projecting slight depreciation. So it’s across the board; a little bit up, a little bit down, depending on how experts are looking at it. What we’re feeling right now is some of those overheated markets where prices went up so rapidly during the pandemic are starting to see more of a shift in prices than some of the other markets that may be holding steady. 

When we average these out across the year, it's roughly neutral, flat home price appreciation in some markets and there may be a little bit of depreciation.

As we come into 2024 and beyond, we’re turning to more normal levels of home price appreciation. As we continue to look forward, we look at things like the Home Price Expectations Survey saying more normal appreciation in the years ahead, all of that is dependent on supply and demand. Inventory is still historically low and will continue to see that in the years ahead. 

I think this quote from Freddie Mac really says that well. It says, “While there may be a little statistical difference between a small positive number and a small negative number –  there are often huge differences in how they impact behavior.”

What we also know, especially as we look back in time, we had the great financial crisis. There were five years of continued depreciation. No one is calling for that extended long period of depreciation right now. It may be a little rocky next year and then returning potentially to more normal levels of appreciation. We’re not talking about this long financial crisis ahead of us. We’re talking about, some up some down next year and then back to more normal levels, as we look nationally at that perspective across the board, moving into a much more stable environment.

We’ve talked about interest rates, we talked about prices so what’s happening with foreclosures? 

The above is foreclosure activity by year from ATTOM Data, and it goes all the way back to 2005. If you look at this graphic, ever since 2010 foreclosures have decreased in this country. And there’s a reason for that. Coming out of the financial crisis of 2008, lending standards became a lot stricter.

You have a better qualified borrower, stricter standards, you have less defaults. The bars in red show when distressed properties or foreclosures in this country were over a million units in the year. Every year we’ve seen less and less foreclosures. Even if you take 2020 and 2021 off the map because they’re anomaly years.

So the question really becomes, are we about to see a bunch of foreclosures coming to the market? One of the leading indicators of that is delinquencies. And delinquencies are down right now. But if you look at foreclosures, ATTOM Data says this: “Only about 214,800 homeowners were facing possible foreclosure in the second quarter of 2022, or just four-tenths of 1% of the 58.2 million outstanding mortgages in the U.S.” This is four-tenths of 1%. If you think about that, this is a number that, if you were to sit down with a servicer or somebody in the mortgage business that’s in the side that looks at foreclosures in a portfolio of mortgages, they would generally tell you they’re okay with about 1% default rate in a portfolio. 

We’re less than half of what they’re okay with. Foreclosures are very, very low.  Of those facing foreclosures, about 195,400 or 91% had at least some equity built up in their homes. People do get foreclosed on that have equity in their homes. But the bottom line is people have options. They can sell their home, put some money in their pocket and sort of move to the other side of the financial crisis they and their family have faced.

Rick Sharga said this: “Anyone waiting for a huge foreclosure wave will probably be disappointed by this report from ATTOM Data. Foreclosure activity was flat from Q1 to Q2 and foreclosure starts dropped slightly from August to September.”

But the bottom line is, there’s not this pent-up demand of foreclosures coming.

People wonder, "are we about to see a wave of inventory hit the market"? Well, this is a look at the end of October and where’s housing supply at? If we look at the same week in 2021, we’re up almost 40% – 39.5% up over 2020, slightly 6.3%, but down over 2019, just over 37%. 

So not only are we NOT seeing this wave of foreclosures come, we’re not seeing a wave of inventory hit the market. Certainly more than last year, certainly more than the year before. But if you look at prior to COVID, we are still down across the country in available inventory. 

What’s the alternative? The alternative is renting. This slide shows the median asking rate going all the way back to 1988. Rents across the country have skyrocketed. I am astonished at the rental prices in Gainesville and surrounding towns. Being in the property mangement business as well allows us to see this first hand. We have increased our rent prices 20 to 40% across the board. We are still getting multiple applications per property although we are seeing an uptick in bad credit so we have to search longer for a good qualified tenant.

Rental inventory is impacted by supply and demand just like housing is. And we’re seeing that go through the roof. But the bottom line is, if you’re renting and you’re paying through the nose for your rent, it's hard to save for a down payment. 

We know that homeownership wins. There are certainly people who have been priced out of this market. But the bottom line is, buying a home over time wins for many, many people that do it. It gives them options down the road through the equity. That’s not even counting all the nonfinancial benefits that people buy a home. 

Odeta Kushi said  “If you can find a house that meets your financial expectations for a monthly payment and it’s a good time for you to buy, then do that, . . . And if you wait for prices to fall, but they never do, you may discover the hard way that the house you found a year ago that you really loved, that you could afford but you passed up on, is more expensive next year.”

That’s the bottom line. Certainly, local market dynamics are at play, but there are some people on the sidelines going, I’m going to wait till prices fall. I don’t think they’re going to see that.

Jason Lewris from Parcl said this and said it very, very well: “In the absence of trustworthy up to date information, real estate decisions are increasingly being driven by fear, uncertainty and doubt.”