The housing industry is in limbo. Existing home sales fell to their lowest level in nearly 30 years last year as no one was selling or buying homes. This was the result of a lock-in effect and reduced demand, the former as mortgage rates soared from pandemic-era historic lows and the latter as home prices soared along with borrowing costs.
The expectation was that things would get better this year, and in some ways they have, but the housing market remains sluggish, making “an imminent recovery unlikely if mortgage rates rise above 6.5% this year as we expect,” Thomas Ryan of Capital Economics wrote earlier this week, referring specifically to mortgage applications.
While mortgage applications for home purchases increased last month as mortgage rates fell below 7%, “the increase was minimal given that applications have been at a three-year low,” the economists continued.
Mortgage applications are only 12% higher than the 28-year low recorded last October, when mortgage rates reached their highest level in more than 20 years. And that may not last long, as lower mortgage rates have helped shore up this downturn and are now trending upward again. The average 30-year fixed weekly mortgage rate is 6.95%, and the daily mortgage rate is even higher, at 7.03%.
In a further sign of weakening demand due to the severe housing shortage, home purchase and sale contracts fell 2.1% in May, the lowest on record, with all regions in the country recording declines on an annual basis. Redfin recently reported that home purchase and sale contracts fell 5% in the four weeks ending June 30, the biggest drop in recent months. Also signaling weakening demand, Redfin's Home Buyer Demand Index, which measures desire for tours and other homebuying services from agents, is down 17% year over year.
Additionally, existing home sales in May fell 0.7% from the previous month and 2.8% from a year ago. New home sales also plummeted 11.3% in the same month. Meanwhile, home prices continue to reach new all-time highs. Meanwhile, Capital Economics expects existing home sales to “remain extremely weak in the coming months.”
The key to stimulating activity in the housing industry, at least in the short term, is lower mortgage rates. As Capital Economics found, that won't happen unless rates fall below 6.5%. “I think 6.5% would be comfortable, but the magic number is 5.9999,” Robert Refkin, co-founder and CEO of real estate giant Compass, said recently. He added, “That's marketing magic, and it's going to tell the world that mortgage rates are at a level where you should be buying real estate.”
For those looking to sell, this could also be the magic mortgage rate. Capital Economics estimates the average interest rate on an outstanding mortgage is closer to 4%, which is why many people don't want to give up a mortgage with more than 7%. But they might have second thoughts if the rate was closer to 6%, and even less. Still, inventory is rising. As of the week ending June 29, new listings were up 10.8% year over year, and inventory, like all homes for sale, was up 38.1% year over year, according to Realtor.com.
But here's the problem: Some point out that lower mortgage rates could cause sellers to flood the market and send home prices soaring, which isn't good for people who want to buy a home to live in. “If interest rates go down another percentage point… prices will go through the roof,” self-made real estate billionaire and Shark Tank star Barbara Corcoran said in March, not for the first time.
Meanwhile, Chen Chao, economic research leader at Redfin, recently said, “If mortgage rates fall, both buyers and sellers will return to the market. Depending on which force they return with, this could accelerate price increases or cause prices to fall. If sellers return sooner, prices are likely to fall, but if buyers return sooner, prices are likely to rise.”
In any case, it all depends on whether the Federal Reserve cuts interest rates. The central bank is only scheduled to cut interest rates once this year, so we will have to wait and see how much impact that will have on mortgage rates.
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