It is not news that there is a housing shortage.  However, some recent studies show that the shortages is many markets is more severe than previously estimated.  In many of the hottest markets, there is less than a two month supply of homes on the market.  Meaning, if all homes that are for sale are sold, and zero new homes are put on the market during the time the existing homes for sale are sold, in two months there would be zero homes available on the market to purchase.  A normal housing market is more like six to 8 months.

Why?  Why is the housing market so crazy?  Why are people buying homes like popcorn at the movies?  Here are some reasons:

1. Better Technology  – It’s easier than ever to shop for and find homes.

2. Low Interest Rates for a long period of time – Mortgager Interest Rates spent longer than ever at lower-than-ever levels.  Owners who refinanced or purchased a new home at these rates have little incentive to give up their mortgages.

3. Remote Work – More and more companies are allowing their employees to live wherever the want and work remotely.  The pandemic was a major cause of this.

4. Supply Chain Problems – Land, labor, and material shortages only hurt housing availability further.

5. Sellers Staying Put – See number 2 above, but also consider that a starved inventory situation only creates an additional reason for sellers to stay put.  It’s a snowball situation

Not surprisingly, applications for home loans have declined rapidly since mortgage interest rates have climbed.  How much?  Here are some interesting statistics:

  • Weekly applications are at the lowest level since December 2018.
  • This week was the third consecutive week of declines, indicating the housing market is also slowing down.
  • Refinance applications are down 75% from their peak in 2021.
  • Purchase applications are down from last week, and have decreased three weeks in a row.

Higher interest rates.  Higher prices.  Higher Inflation.  Until we see a break in any or all of these three root causes, we will continue to see fewer borrowers and applications.

The Mortgage Bankers Association produced a survey of weekly mortgage applications and it shows new applications have slowed considerably.  With the recent rise in interest rates, this should be be surprising to anyone.  Higher rates discourage refinances since many homeowners already have locked in super low rates they obtained over the last two years.  And higher rates make purchases less affordable for new homeowners.

However, this week was a little better than last week.  Meaning there are more applications this week than last, and that might mean consumers are adjusting to the higher rate environment.   Also, mortgage rates are a little lower this week than last – another possible reason for a few more applications this week.

For the past two weeks mortgage rates have been moving downward, ever so slowly.  But this is often the case.  Mortgage rates generally rise much faster than they go down.  Compared to how much they have gone up (about 2.5% over the last 3 months) the .25% move lower isn’t much, but we will take it.

Does that mean mortgage rates have hit a ceiling?  That we won’t see more higher movement?  Well, to answer that, let’s look at what has caused rates to go up and what caused them do recently drop.  The dropped this past week or two mostly because of the drop in the stock market.  As money moves out of stocks, it moves into bonds.  That will almost always bode well for mortgage rates.  But mortgage rates moved higher because of inflation.  And it remains to be seen if inflation is still a threat, or beginning to moderate.  The inflation readings over the next few weeks and months will decide the fate of mortgage rates.

We all know the supply of homes is very low.  We need housing.  So contractors have been extremely busy the last few years.  In fact, most contractors I have talked to will say they aren’t even taking new projects.  They are booked out for at least 2 years.

More housing permits are being filed for than ever before.  Permit applications are up and housing starts are also up.  However, there is another report that shows housing completions and that is troubling.  The number of housing completions remains stagnant.  So, more houses are being started every month, but the same number of houses are being completed as before.  Thus, it is taking longer and longer to build a home.

Why?  Well, there are a myriad of reasons, but certainly supply chain issues and lack of labor top the list.

Mortgage Interest Rates are doing much better than we have seen in the last couple months.  It’s been such a bumpy ride, watching rates go up and up and up since around February.  For them to steady off and actually go down a little has been a breath of mortgage fresh air.

The bond market finally stabilized last week after being slaughtered for weeks and weeks.  The bad bond market pushed rates higher at the fastest pace since the early 1980’s.  Why?  Inflation.  The Fed had to start raising rates and stop it’s buying of mortgage backed securities.  It is only the beginning – most experts expect the Fed to keep tightening their policy to check inflation.

How long will the Fed keep tightening and raising their rate?  It’s unclear.  But most likely until they feel comfortable that inflation is in check and not a worry to the overall economy.  Some indicators show we are already seeing inflation start to soften, albeit ever so slightly.

Don’t expect mortgage rates to stop going up though.  This is a slow down, not necessarily a hard stop.  It’s likely rates will rise some more throughout 2022.

This year has been crazy for mortgage rates.  With most of the moves being up instead of down.  Yesterday we finally saw the bond market have a day to make mortgage rates move down.  Yay!

The day didn’t start out that way.  In fact, mortgage rates started the day near their highest level ever.  But by early afternoon, the bond market rallied and mortgage rates started moving down.  There were some big losses in the stock market and the oil market, which moved money from stocks into bonds.  And the Fed made some friendly comments to spark some more buying for bonds.  When traders are buying more bonds than they are selling, the prices for bonds rise and mortgage rates go down.

By the afternoon there was enough movement that most lenders did a re-price and lowered rates.  And so far this morning they are holding.  Fingers crossed!

Mortgage Interest Rates hit their highest levels since 2009 yesterday.  The recent rise in mortgage rates is the fastest spike since the early 1980’s.  Why?  Inflation and the Federal Reserves attempts to address it.  The Fed has a press conference tomorrow and will give an official policy announcement.  This could cause more rate volatility.

The Fed is expected to hike its policy rate by 0.50%.  But we need to remember this doesn’t mean mortgage rates will also rise .50% equally.  The mortgage market adjusted for this probability long ago.  The Fed controls short term interest rates – the rates banks use to lend to one another, not mortgage rates.  However, what the Fed does to affect inflation and the overall economy does affect long term rates like mortgage rates.

Of more consequence will be if the Fed says it will be buying fewer bonds.  This has a far more direct effect on mortgage rates.  Depending on which path the Fed chooses, mortgage rates could have big movement tomorrow, higher or lower.

Mortgage Interest Rates may be at the highest levels in more than 3 years, but the housing market has yet to show visible signs of slowing down.  April’s release of the Housing Market Index (HMI) is the latest data supporting that thesis.

The HMI number portrays builder confidence, and while it is down slightly from the previous month’s reading, it remains historically high.  Both the HMI and the “buyer traffic” index remained higher than at any other time before the covid-driven real estate boom.

Neither of these numbers suggest that housing is immune from high interest rates.  The crazy fast pace of home price appreciation combined with one of the sharpest mortgage rate spikes in history causes real concern for the industry and affordability problems for home buyers.

NAHB’s Chief Economist Robert Dietz spoke about this: “The housing market faces an inflection point as an unexpectedly quick rise in interest rates, rising home prices and escalating material costs have significantly decreased housing affordability conditions, particularly in the crucial entry-level market.”

With the 10 year Treasury rate at 2.8%, based on historical relationships, a 30 year conventional mortgage should have a rate of 4.5%, however, it’s now over 5%. I suspect that this is because investors expect the Fed to keep raising rates. Given that the Fed might raise the Fed funds rate to 3.25% and have suggested maybe as high as 4.0%, this suggests that mortgage rates should peak at 5.7%, possibly 6%.  Buckle up!