Today’s housing market is in good shape, with the combination of record low mortgage interest rates, rising new home sales and increased mortgage applications. The main thing holding it back? The U.S. has a serious housing shortage.
Some 60% of real estate agents surveyed in June reported a rise in multiple offers on a single listing, according to a study of 2,000 real estate professionals from HomeLight. There are more buyers than there are homes to buy.
Rates Stay Below 3%, Giving Borrowers Another Week of Ultra-Low Rates
The average mortgage rate on a 30-year fixed mortgage was 2.96% this week, just 8 basis points up from last week’s record low rate. It’s these ultra-low rates that are pushing up mortgage applications for both buyers and people who want to refinance existing mortgages, says Joel Kan, associate vice president of economic and industry forecasting at the Mortgage Bankers Association.
“Home purchase activity continued its strong run with a 2% increase over the week and was up around 22% compared to the same week a year ago,” Kan said in a statement. “While this was still positive news for the purchase market, the gradual slowdown in the improvement in the job market and tight housing inventory remains a concern for the coming months, even as low mortgage rates continue to provide support.”
Home Prices Spike in Much of the Country
Not only are sales up, but home prices are rising, too. The median price on single-family homes rose year-over-year in 174 of 181 metropolitan areas measured, according to a recent report by the National Association of Realtors (NAR). In the second quarter of 2020, the median price on an existing home was $291,300, a 4.2% increase from the same time last year.
The six areas that saw the biggest jumps in home prices are:
- Huntsville, Ala. (13.5%)
- Memphis, Tenn. (13.4%)
- Boise, Idaho (12.6%)
- Spokane-Spokane Valley, Wash. (11.8%)
- Indianapolis (10.8%)
- Phoenix (10.2%).
Mortgage rates are not the only contributor to rising home prices, says Lawrence Yun, chief economist at NAR. Low inventory across the country is also helping to keep home prices up as demand stays elevated. This perfect storm is good news for homeowners and sellers who might have otherwise seen a drop in prices amid the coronavirus pandemic.
“Home prices have held up well, largely due to the combination of very strong demand for housing and a limited supply of homes for sale,” Yun says. “Historically low inventory continues to reinforce and even increase prices in some areas.”
Although the inventory shortage might be good for home values, it has shrunk the pool of people who can afford to buy a home, according to the latest National Association of Home Builders (NAHB)/Wells Fargo Housing Opportunity Index (HOI).
Only 59.6% of families earning the adjusted U.S. median income of $72,900 could afford new and existing homes between April and the end of June. This is the lowest reading since the fourth quarter of 2018, according to the report.
A Freddie Mac report shows that 29 states have a housing deficit, with a concentration in places that have strict zoning laws.
New Construction Is Picking Up, But Builders Face Challenges
New residential home construction is falling short of demand due to several roadblocks, namely the rising price of lumber, coronavirus-related slowdowns and imposing regulations that drive up costs and prevent new construction. In fact, demand is so strong that mortgage applications for new homes have shot up by 39% from this time last year, according to MBA.
“Construction is slower than it well could be, but sales of new homes are still going gangbusters,” says Jerry Howard, CEO of NAHB. “One thing that’s slowing down the pace is that lumber prices have gone up exponentially in the last few months, in part because the harvest we have of timber on public and private lands is down, according to the secretary of Agriculture.”
Tariffs on Canadian lumber, which average just over 20%, are being passed on to families, which is making it more difficult to build, Howard says.
Regulations in some parts of the country also make building, for many families, impossible. In places like California, impact fees are three times the national average, according to a report by The Terner Center for Housing Innovation at UC Berkeley. This extra cost puts an enormous financial burden on people who want to build. Impact fees are charged to building developers by the local government to pay for utilities and services to support the new construction.
Places that are seeing the most construction are what Howard calls “pro-growth, lower regulatory and lower-tax states” like Texas, the Carolinas and Florida.
The lack of skilled labor—once a major problem in new construction—now seems to be moving in the right direction. In May, 679,000 workers were hired in construction, according to the Bureau of Labor Statistics, with another 498,000 added in June, which is up by 75,000 jobs in June 2019.
“We’re definitely seeing more talent in the industry, which is a good sign,” Howard says.
Mortgage Refinance Activity Rises But Could Be Stymied By a New Fee
Mortgage refinances made up the bulk of mortgage activity last week as rates hit their lowest recorded levels per Freddie Mac, rising to 65.7 percent of total applications from 63.9 percent the previous week. While refinances have driven the mortgage market during the downturn, a recent announcement from Fannie Mae and Freddie Mac might have put nails on the road.
The government-sponsored enterprise giants announced Wednesday that they would assess an “adverse market refinance fee” to offset risks posed by an uncertain economy for all refinances that close on or after Sept.1. The fee is 0.5% (or 50 basis points) of the total loan amount, which could add hundreds or thousands of dollars to the cost of refinancing. For borrowers who are currently in the process of refinancing but have not yet locked in a mortgage rate, they could end up owing this fee if their loan doesn’t close by the start date.
A coalition, made up of 20 mortgage and housing industry organizations and public interest groups such as the Center for Responsible Lending, the Community Home Lenders Association, the Housing Policy Council, Mortgage Bankers Association and the National Association of Affordable Housing Lenders, has criticized the move in a joint statement.
“Wednesday night’s surprise announcement by Fannie Mae and Freddie Mac (the GSEs) conflicts with the Administration’s recent executive actions urging federal agencies to take all measures within their authority to support struggling homeowners. The additional 0.5% fee on Fannie Mae and Freddie Mac refinance mortgages will raise costs for families trying to make ends meet in these challenging times.”
This new move makes it even more important for borrowers to get cost transparency from their lenders before they sign a contract. If your goal is to reduce your interest rate and overall home loan costs by refinancing, make sure the closing costs, including the new fee, don’t outweigh the savings.