Housing Update: Mortgage Rates Increase But Homes Sell Even Faster…

Every two weeks, I curate this article to summarize exactly what is going on in the housing market. The Fed has stood by its guns, stating that they will continue forward with additional interest rate hikes this year, the next of which is expected in early May at .50% to continue to fight inflation. Consumer inflation broke a 40-year record coming in at 8.5% last week. This number, however, is much lower than the true inflation figure. This is because the Fed manipulates this number by using a housing component they call "housing equivalent rent", which accounts for 33% of this CPI number. This housing equivalent they are using to measure rising housing expenses for Americans is listed at only a 5% increase. However, mortgage payments are up over 30% in the last 12 months, and rents are up over 20% in the same period. This 5% number is a number they use, citing it as the average "increase" in what a homeowner would expect to rent out their home for. In layman's terms, it is a B.S. number that brings down real inflation because Americans would panic if they said the true inflation number of 12% or more.

The Fed's only lever to control inflation is to increase rates; however, this will slow the demand for consumption, and it will not fix the real issue, which is the lack of home supply. We will have a real housing inventory issue for years to come. As it stands, there are currently less than 400,000 homes for sale in the entire U.S. This number has continued to fall every month for the last 2 years. In order for home prices to begin to fall, we need to see at least 1,100,000 homes for sale in the U.S. which would give us about 5 months of inventory. We currently have only 1.7 months of inventory. Even with mortgage rates at 5% we saw that half of the homes listed in the U.S. went under contract with a buyer in less than 1 week!

With rents continuing to rise and the U.S. and a massive shortage of homes due to the largest demographic of millennials reaching homebuying age between 2022-2025, a home that is within $150,000 above or below the average priced home in any city, is still getting multiple offers within the first week. I expect homes that are double the average priced home or more in any city to see some slowing with the increase in mortgage rates due to more individuals choosing to stay in their homes rather than sell and move to a more expensive home.

Homes that are located in markets that are less expensive than neighboring metro areas will still see a 5 to 10% price increase this year. Markets like Riverside County, North San Diego County, Mesa Arizona, Mount Juliet TN, Sacramento, CA, San Antonio TX, Fort Worth TX, and many other areas will continue to see massive demand.

In every economy where we have seen the Fed raise rates 5 times or more within 18 months, we have seen mortgage rates fall by at least 1.5% or more in the following months. I expect mortgage rates have seen the bulk of their increase for the year. I expect mortgage rates to level out between 5-5.5% for the next 12 months. Then expect mortgage rates to come back down mid-2023 in the low to mid-4 % range. Making any homebuyer that purchased or did a cash-out refinance in 2022 an excellent candidate to refinance into a lower rate in 12 to 18 months.

The only way we will see a housing market collapse is if we can get a severe increase in the supply of homes by at least 6X from where we are today. With more homeowners staying put than ever before and homebuilders simply not delivering enough homes to the market between 2008-2020, we will not even get close to inventory levels we saw Pre Covid for at least another 2 years. Foreclosure rates are also at their lowest levels in 50 years as homeowners are sitting on a mountain of equity and a very low fixed rate.

If you have equity in your home and it is just sitting there doing nothing to increase your net worth, I would strongly look at borrowing some of your equity through even a cash-out refinance or equity line of credit. Look at taking those funds and investing into a vacation rental or long-term investment property to take advantage of increasing rents. If you have any questions about this, just reply to this blog!