Anyone who’s followed the housing market in the last year knows that it’s been a particularly nasty environment for home sales. Last year’s rate hikes resulted in fewer mortgage applications and home purchases. Mortgage applications at the end of 2022 were at their lowest level in almost 25 years.
Finally, there are new numbers that show that the story is starting to change. Mortgage rates have fallen by 0.93% from their Nov. high. The average 30yr mortgage is now 6.15%, according to Freddie Mac.
According to the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending January 20, 2023, Mortgage applications increased 7% from the previous week.
“Mortgage rates declined for the third straight week, which is good news for potential homebuyers looking ahead to the spring home buying season. Mortgage rates on most loan types decreased last week and the 30-year fixed rate reached its lowest level since September 2022 at 6.2 percent,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “Overall applications increased with both gains in purchase and refinance activity, but purchase applications remained almost 39 percent lower than a year ago. Home buying activity remains tepid, but if rates continue to fall and home prices cool further, we expect to see potential buyers come back into the market. Many have been waiting for affordability challenges to subside.”
There are several reasons demand will continue to remain high in spite of what mortgage rates do.
1. The Rental Market
Rent increases have just started to pull back from a furious build-up that was complicated by the pandemic. For the fourth month straight, however, rental prices have decreased, according to Apartment List.
“Rents decreased in December in 90 of the nation’s largest 100 cities,’ the report stated, “with prices down by 3% month-over-month.”
Rents and mortgage rates ramped up so much in recent years that it pushed more people who would be home buyers to rent homes. It has also led to a “roommate generation” where sharing a rental home makes sense.
With the increased demand for rental properties, many would-be sellers have opted to rent their homes instead of selling, leading to fewer available homes on the market.
2. Investor Purchases
Hedge funds and REITs have been bigger players in recent years, gobbling up homes and leading to higher prices and decreased supply. According to Glenn Kelman, CEO of real-estate brokerage Redfin, investors are still on the prowl, and are scouring disaster zones for deals.
In 2021, investors bought 24% of all single-family homes sold nationwide, a Pew Trusts report said last year.
Kelman said that some out-of-town investors today are tracking damaged homes, such as in Florida, to find deals.
When he recently visited a local office in Florida, Kelman said Redfin employees in areas affected by Hurricane Ian told him that investors were calling as the hurricane made landfall.
3. Pent-up Demand
In the US, decades of under-building has meant that there just isn’t enough inventory. The youngest generation of home buyers put off purchasing for a variety of reasons, and now that they are affluent enough, they have found that there are no homes to buy and that they are often priced out when they can find a home.
All of this should lead to improving conditions and strong demand going forward. December’s Jobs report showed the construction industry added 28,000 jobs. That’s 9,000 above its average last year. Input costs for construction are coming down. All in all the prospect for the housing industry is looking better for 2023.