RATES, DEMAND, SUPPLY, & THE FEDS

MAY 25, 2023

When news of rates increasing starts to make it to the headlines, demand goes down. Mortgage applications for home purchases are down 4% from last week and down 30% year over year. Refinance applications are down 5% from last week, and 44% year over years as the average 30 YR rate inches up to 6.69%.  

3 years ago, the 30-yr mortgage rate was 3.15% and the average new home price in the US was $369,000. Today, the 30-yr mortgage rate is 6.69% and the average price of a new home is $501,000. 

The average down payment has increased by $26,000, and the rate difference means their payment is 100% higher. The number one concern homebuyers have today is whether or not they can afford to buy. With an imminent recession, many are also concerned about losing their jobs.

Meta began its latest round of layoffs, expected to hit ad sales, marketing and partnerships teams in an effort to eliminate 10,000 roles. Google, Microsoft, Meta and Amazon are hiring again, but at much lower salaries. Banks are laying off employees by the thousands.

Fun fact: 63% of tech workers report they’ve started their own company since being laid off. 93% of them are competing with the company that let them go. 

How do we solve for affordability? Should home prices plummet, or rates come down? Will wages grow? How does uncertainty in the job market impact demand? 

Home sales are down 23% from last year, but home prices are only down 4% from their peak levels. Despite the fastest set of rate hikes in history, housing remains stable. With millions of people locked into low mortgage rates with no incentive to sell, a spike in inventory is not likely. 

There is a 66% chance of another rate hike by the Feds before July. The good news is, it appears were peaking and rates could turn around soon. The chart below gives you a clear picture of the trend. Rate hikes put a strain on the economy. The regional banking crisis is a perfect example. Many argue that with less banks willing to lend, demand could suffer. I will remind you, there are always plenty of ways to get a mortgage outside of the traditional banking system. The rates and terms are similar, and in many cases better. 

The job market can play a significant role in reducing demand. When people are uncertain about their job, they  wont be shopping for a home. Layoffs increase during a recession. Continued rate hikes will make this scenario inevitable. 

WHAT HAPPENS NEXT?

The next CPI report is due out June 13, 8:30 AM EST. We expect this number to come in lower than expectations. We are hopeful this news will impact the Fed’s decision to hike rates as they will be meeting from June 13-14th. 

Germany, the 4the largest economy in the world announced they are in a recession today. 

"Under the weight of immense inflation, the German consumer has fallen to his knees, dragging the entire economy down with him," said Andreas Scheuerle, an analyst at DekaBank.

Household consumption was down 1.2% quarter on quarter after price, seasonal and calendar adjustments. Government spending also decreased significantly, by 4.9%, on the quarter.

— Reuters

Article Written and Provided by Padi Goodspeed of Cross Country Mortgage