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Two-thirds of homeowners with mortgages have rates that are 2.5 percentage points or more below what they could qualify for today, creating a “lock-in effect” that’s likely to keep many would-be sellers on the sidelines this spring, real estate data and analytics provider Black Knight warned Monday.

The reluctance of existing homeowners to give up the low rates on their existing mortgages is contributing to shortages of new listings that keep prices higher than they would be otherwise, Black Knight said, as elevated rates continue to lock would-be sellers in place.

Andy Walden

“The interplay between inventory, home prices and interest rates has been the defining characteristic of the housing market for the last two years, and this continues to be the case,” said Black Knight researcher Andy Walden in a statement. “Today, we see buyer demand dampened under pressure from rising rates and their impact on affordability, with purchase rate-lock volumes cooling in late February … On the other side of the equation, we’ve seen a consistent theme of potential sellers – many with first-lien rates a full 3 percentage points below today’s offerings – pulling back from putting their homes on the market.”

Distribution of current mortgages by interest rate

In an attempt to keep the economy from crashing during the COVID-19 pandemic, the Federal Reserve pulled out the stops, bringing short-term interest rates down to nearly 0 percent and buying trillions of long-term Treasury notes and mortgage-backed securities to encourage borrowing.

Most homeowners who could refinance their mortgages to obtain lower rates took advantage of the opportunity, Black Knight data shows. But when the Fed reversed course last year and began tightening monetary policy to fight inflation, mortgage rates shot up leaving most mortgaged homeowners with little incentive to refinance — and facing higher mortgage rates if they wanted to trade up or down.

New listings plummet from pre-pandemic levels

When compared to pre-pandemic levels (2017-2019), monthly new listing volumes have been below average for 25 consecutive months. Source: Black Knight Mortgage Monitor 

Although the latest data from Realtor.com shows year-over-year inventory growth in most markets during February, the trend was driven largely by the fact that it’s taking longer for homes to sell, so they’re sitting on the market longer — 67 days on average, compared to 44 days a year ago.

Black Knight’s analysis found monthly new listing volumes have been running below pre-pandemic averages for 25 consecutive months.

New listing volume was down 25 percent in January when compared to the same month average before the pandemic, the biggest drop since April 2020, when most of the country was in lockdown and new listing volume dropped 34 percent.

“With would-be homesellers currently sitting on the sidelines, inventory shortages could continue well into the foreseeable future,” Black Knight analysts warned. “That new listings number is a key metric to watch as we move through the spring homebuying season.”

Change in inventory from pre-pandemic levels, by market

Change in inventory of homes for sale from pre-pandemic levels in select markets | Source: Black Knight Mortgage Monitor 

While there’s considerable variation by market, Black Knight’s analysis found only eight of the nation’s 100 largest markets have inventory at or above where they were in the years leading up to the pandemic (2017-2019), including Las Vegas (up 25 percent), Boise (up 9 percent), Austin (up 7 percent), and San Francisco (up 5 percent).

Nationally, inventories were down 43 percent from pre-pandemic levels in January, and more than a third of markets have less than half of what was considered normal inventory levels.

In their latest forecast, Fannie Mae economists projected home sales will fall 17.6 percent this year to 4.67 million, with the nation likely headed for a modest recession during the second quarter.

Forecasters at the mortgage giant— who began issuing warnings about the potential impacts of the lock-in effect after rates started climbing last year — anticipate that a broader economic recovery will drive a “partial rebound” in 2024, with total sales rising 9.6 percent to 5.12 million units.

Number of mortgages originated hits 21st century low

First-lien mortgage originations by purpose | Source: Black Knight Mortgage Monitor 

Rising mortgage rates have created a double-whammy for lenders, denting purchase mortgage originations and limiting refinancings primarily to borrowers looking to cash out equity.

During the final three months of 2022, lenders originated just 1.08 million first-lien mortgages — the fewest in a single quarter since Black Knight began tracking that metric in 2000.

Because home prices are much higher than they were at the turn of the century, the $384 billion in mortgages originated in the fourth quarter of 2022 looks better from a historical perspective, but that was still the lowest fourth-quarter dollar volume since 2015, Black Knight said.

Cash-out refinance originations fall to 2015 levels

Total equity cashed out and average withdrawal per borrower by quarter | Source: Black Knight Mortgage Monitor 

Of the 216,000 refinances in the fourth quarter, 96 percent were cash-out loans — the highest share of any quarter on record — and borrowers who refinanced were willing to accept a 2.4 percentage point increase in their mortgage rates, on average.

Although almost all refinancing now consists of homeowners cashing out equity, that business has declined as well as borrowers balk at paying higher rates. During the final three months of 2022, homeowners cashed out $19 billion in equity, the lowest amount since early 2015.

But homeowners cashing out despite higher rates are borrowing more than those who took advantage of that opportunity when rates were lower. During the fourth quarter of 2022, the average cash-out withdrawal per borrower exceeded $95,000 compared to around $55,000 in late 2020.

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