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Mat Ishbia, United Wholesale Mortgage CEO & Phoenix Suns owner, joins ‘Closing Bell Overtime’ to talk regional banking turmoil, the labor market, mortgage rates and more.
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Tag: mortgages
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June home sales drop to the slowest pace in 14 years as short supply chokes the market
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A house is for sale in Arlington, Virginia, July 13, 2023.
Saul Loeb | AFP | Getty Images
Sales of pre-owned homes dropped 3.3% in June compared with May, running at a seasonally adjusted annualized rate of 4.16 million units, according to the National Association of Realtors.
Compared with June of last year, sales were 18.9% lower. That is the slowest sales pace for June since 2009.
The continued weakness in the housing market is not for lack of demand. It’s all about a critical shortage of supply. There were just 1.08 million homes for sale at the end of June, 13.6% less than June of 2022. At the current sales pace, that represents a 3.1-month supply. A six-month supply is considered balanced between buyer and seller.
“There are simply not enough homes for sale,” said Lawrence Yun, chief economist for the Realtors. “The market can easily absorb a doubling of inventory.”
That dynamic is keeping pressure under home prices. The median price of an existing home sold in June was $410,200, the second-highest price ever recorded by the Realtors. Last June’s price was the highest, but by barely 1%. This median measure, however, also reflects what’s selling, and right now, with mortgage rates much higher than last year, the low end of the market is most active.
“Home sales fell, but home prices have held firm in most parts of the country,” Yun said. “Limited supply is still leading to multiple-offer situations, with one-third of homes getting sold above the list price in the latest month.”
Sales are unlikely to recover anytime soon, as mortgage rates weigh heavy on affordability. The Realtors measure June sales based on closings, so contracts that were likely signed in April and May. Mortgage rates hung in the mid 6% range during that time and then shot up over 7% at the very end of May. Rates stayed in the 7% range for all of June, as home prices rose.
First-time buyers are struggling the most. Their share of June sales fell to 26%, down from 30% in June 2022. That is the lowest share since the Realtors began tracking this metric.
The higher end of the market, however, appears to be recovering. While sales were down across all price points, they were down least at the higher end. That was not the case last year, when higher-priced home sales were dropping off sharply.
As the competition heats up, buyers are increasingly using cash to win over sellers. All-cash sales made up 26% of June transactions, slightly higher than both May and June of last year.
Sales are unlikely to rebound soon in the existing home market, but sales of newly built homes are reaping the benefits. The nation’s largest homebuilder, DR Horton, reported a big jump in new orders jumping in its latest earnings release Thursday.
“Despite continued higher mortgage rates and inflationary pressures, our net sales orders increased 37% from the prior year quarter, as the supply of both new and existing homes at affordable price points remains limited and demographics supporting housing demand remain favorable,” said Donald Horton, chairman of the board, in a release.
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The SBA guidelines on energy efficiency in mortgages: Where things stand 180 days before coming into force – Banking blog
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The self-regulation guidelines from the Swiss Bankers Association (SBA) on the promotion of energy efficiency in mortgages have shone a sudden spotlight on the subject of ESG in financing. While the current guidelines are limited in scope, they nevertheless present challenges for banks in Switzerland, as they may well be extended in the future. Banks are well advised to adjust their lending operating model not only in the short term, but also strategically for the longer term.
ESG criteria for mortgage financing are new in Switzerland
With the Paris Agreement, Switzerland set a goal of reducing greenhouse gases by 50% from a 1990 baseline by 2030. However, this is only a stepping stone to the net zero target for 2050.[i] Despite making significant progress, Switzerland narrowly missed its targets for 2020.[ii]
Buildings account for a significant proportion of greenhouse gas emissions (roughly 25%) and an even higher proportion of energy consumption (approximately 45%).[iii],[iv] Heating, much of it powered by fossil fuels such as natural gas and oil, makes up the bulk (68%) of this energy consumption.[v] Achieving climate goals will necessarily entail building renovations with focus on energy efficiency, but the 0.9% renovation rate in Switzerland remains far too low despite the incentives of a carbon tax and a building energy renovation programme.[vi] This suggests that there may be an “information deficit”. Unsurprisingly therefore, mortgages and mortgage providers are increasingly attracting attention from regulators — after all, mortgage providers have regular contact with both new and existing property owners, and consequently have opportunities to discuss sustainability issues with their clients. But while in the EU clear rules on dealing with potential climate risks from financing already exist (EBA/GL/2020/06, 4.3.5 and 4.3.6), Switzerland has so far limited itself to disclosure of climate-related financial risks, and only for category 1 and 2 banks (FINMA Circular 2016/01). Sustainability is an increasingly important topic in the political arena, fuelled among other things by the debate around UBS and CS. For example, a bill of targets in climate protection, innovation and energy independence was adopted with a substantial majority of 59.1% in the referendum of 18 June 2023, and this is likely to further intensify regulatory pressure. The SBA self-regulation “Guidelines for mortgage providers on the promotion of energy efficiency” that came into force on 1 January 2023 introduce ESG-related lending requirements for the first time in Switzerland, requiring banks to address the topic of energy efficiency in buildings with customers for mortgage financing.[vii],[viii]
Numerous challenges for banks despite narrow scope
It should be noted that there are two limitations to the guidelines. First, they are voluntary self-regulation by the Swiss Bankers Association (SBA).[ix] Unlike other self-regulation (such as CDB 20), the guidelines are only binding on SBA member institutions. This means for example that the Raiffeisen banks are not directly affected by the guidelines despite their large share of the mortgage market (approx. 17% in 2022). The same goes for insurance companies and pension funds (approx. 5% market share in 2022).[x] There are also limitations relating to the properties concerned. The guidelines apply exclusively to owner-occupied single-family and vacation homes. Nevertheless, the new requirements are sufficiently comprehensive to present banks with challenges that should not be underestimated — not least because the guidelines also apply to existing loans. The guidelines concern five main topic areas: (see Figure 1 for detailed contents of each section).
- Provision of information (Art. 5)
- Advising customers (Art. 2 & Art. 5)
- Terms and conditions (Art. 3)
- Data (Art. 4)
- Training and professional development (Art. 6)
With the exception of the “Terms and conditions”, the requirements in each area are compulsory and member institutions must implement them appropriately. However, implementation is complex because the guidelines contain principles-based requirements (thus leaving room for interpretation) while also covering matters that have an impact on the overall process (such as capturing energy efficiency data). Figure 1 provides an overview of the key contents along with selected implementation challenges for each topic area.
Figure 1: Overview of key contents of the new guidelines and selected challenges for banks
It is unsurprising that some Swiss banks have made more progress than others with implementation, particularly in view of the transition period up to 1 January 2024. Nevertheless, banks would be well advised to obtain clarity as soon as possible as to what changes will be needed by the end of 2023. If they fail to do so, they run the risk of having to implement a large number of tactical auxiliary measures shortly before the end of the transition period, which could impair their competitiveness. An interim analysis by the exclusive Deloitte Mortgage Survey in early June (see Figure 2) found that some 88% of institutions indicated that they had already incorporated ESG issues into their consultations. Where further-reaching measures are concerned, however, the picture is more differentiated. Just 21% of respondents use ESG as a criterion in property appraisals (for mark-up/write-down purposes), while only 33% have special terms for houses with a good eco score. By contrast, 25% of respondents plan to define ESG-related KPI targets for their mortgage portfolios, while 42% intend to introduce customer incentives for ESG renovations in 2024.
Figure 2: Survey on implementation status (as of 30 June 2023, n=24)
Taking the opportunity for sustainable optimisation of lending operations
While banks have the option of relying on particular tactical measures in implementing the new guidelines (e.g. manual entry of certificates and labels in customer files, fact sheets/links to subsidy programmes), this approach is likely to fall short in meeting changing regulatory demands. The provisions in some other markets go considerably further than those in Switzerland. For example, the draft of the seventh MaRisk amendment (published in September 2022) adopts parts of the previous German Federal Financial Supervisory Authority (BaFin) memorandum on managing sustainability risks, such as adjustments to credit risk strategies and appetite considering ESG risks, as well as ESG risk measurement at the portfolio level. The requirements will be subject to audit. At present this is not the case for the new SBA guidelines, but it is quite conceivable that FINMA will take similar measures in the years to come. The scope of properties affected is also likely to expand (to include, for example, investment properties). Last but not least, it is also clear that Switzerland will not be able to avoid the international trend towards better measurement and reporting of climate risks. Banks are therefore well advised not to take the changes associated with the SBA guidelines too lightly. The opportunity here is to use the momentum to achieve a better strategic alignment of their lending business with future challenges, such as those related to their future operating model (see also https://blogs.deloitte.ch/banking/2021/03/strategic-trends-and-implications-for-bank-operating-models.html). There are already examples in the market of banks with innovative, comprehensive solutions, such as home2050, a collaboration between Basellandschaftliche Kantonalbank and the canton’s leading energy supplier: among other things this offers a solution for assessment of the potential, financing and installation of solar equipment and the associated energy system.
In deciding what to do next, banks should specifically ask themselves the following five key questions:
- What gaps still exist in respect of the SBA requirements?
- What short, medium and long-term measures can be taken to close these gaps?
- What further initiatives/projects could impact the implementation of the guidelines, and where can synergies be utilised?
- Are we seeking a purely tactical implementation for the sake of compliance, or will we utilise the momentum for a comprehensive, forward-looking transformation of the lending business?
- Will we implement the requirements ourselves or work with an external partner?
You can also view this blog on our website in English and German.
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[i] https://www.bafu.admin.ch/bafu/en/home/topics/climate/info-specialists/emission-reduction/reduction-targets.html
[ii] https://www.bafu.admin.ch/bafu/en/home/topics/climate/info-specialists/emission-reduction/reduction-targets.html
[iii] Federal Office for the Environment [FOEN] – CO2 statistics (2022)
[iv] Swiss Federal Office of Energy [SFOE] – Analysis of Swiss energy consumption 2000-2020 by specific use (2021)
[v] The Federal Council – Switzerland’s long-term climate strategy (2021)
[vi] https://www.sia.ch/de/politik/energie/modernisierung-gebaeudepark/
[vii] Requirements are only binding for SBA member banks
[viii] A transition period until 1 January 2024 applies for adaptation of internal bank processes
[ix] Cf. https://www.swissbanking.ch/en/topics/regulation-and-compliance/self-regulation
[x] Market share based on own calculations using SNB and FINMA data
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Lena Woodward
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Fed’s Barr: AI could “perpetuate or even amplify” bias in mortgages
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Michael Barr, vice chair for supervision at the Federal Reserve, said in a speech Tuesday that artificial intelligence in mortgage underwriting could exacerbate racial bias if left unchecked. Bloomberg News
The Federal Reserve’s top regulator is wary of the use of artificial intelligence in mortgage underwriting.
Speaking at the National Fair Housing Alliance’s national conference Tuesday morning, Fed Vice Chair for Supervision Michael Barr said advancements in mortgage origination technology could lead to discriminatory lending practices.
Barr called for transparency around the models used by artificial intelligence, or AI, programs. He also noted that the Fed factoring tech advancements into its bank oversight responsibilities under the Fair Housing Act and Equal Credit Opportunity Act.
“While banks are still in the early days of adopting artificial intelligence and other machine learning technologies, we are working to ensure that our supervision keeps pace,” Barr said. “Through our supervisory process, we evaluate whether firms have proper risk management and controls, including with respect to those new technologies.”
Barr’s remarks on AI supervision were part of a broader speech commemorating the 55th anniversary of the Fair Housing Act, a landmark piece of legislation prohibiting racial discrimination in housing sales and rentals.
Barr acknowledged that machine learning capabilities could be used to expand the availability of credit to prospective borrowers without credit scores. This can be done by capturing a wider array of information than what traditional credit rating agencies consider. If these programs operate at a large enough scale, he said, that could also enable them to expand credit more broadly.
Yet, he also noted that these AI programs could “perpetuate or even amplify” certain biases by drawing from data that is flawed or incomplete and thereby reach inaccurate conclusions about borrowers based on their race, color, national origin, religion, sex, familial status or disability. On the other hand, he added, inadequate technology could steer minority borrowers toward more expensive or lower quality financial products — a dynamic Barr described as “reverse redlining.”
Barr’s concerns around algorithmic bias are shared by other regulators in Washington. Consumer Financial Protection Bureau Director Rohit Chopra has been a frequent skeptic of AI-based underwriting and customer engagement. He has pushed for banks and other financial firms to exercise caution when using such technologies.
During his speech, Barr nodded to joint efforts by federal regulators to address bias in home appraisals. Last month, the Fed, Federal Deposit Insurance Corp., Office of the Comptroller of the Currency, the CFPB and the National Credit Union Administration issued two notices of proposed rulemaking, one that would establish best practices for the use of so-called automated valuation models, or AVMS, and another that would codify how borrowers could challenge appraisals that they believe to be inaccurate.
“Deficient collateral valuations can contain inaccuracies because of errors, omissions, or discrimination that affects the value of the appraisal, and a reconsideration of value may help to properly value the real estate,” Barr said. “I am fully supportive of both these proposals because homeownership is an important way for families to build wealth, and we should give them every opportunity to share in those benefits.”
Barr also gave a brief update on regulators’ efforts to reform the Community Reinvestment Act, a 1970s-era regulation that encourages banks to lend in the underserved communities around their branches. The current push aims to modernize the act to account for the impacts of digital and mobile banking, which enable banks to serve areas well beyond their physical locations.
Barr did not say when a final rule would be proposed, but he noted that regulators are working to incorporate the suggestions and address the concerns raised by members of the public earlier this year.
“The agencies are benefitting from the thoughtful comment letters we received on the proposal, and all three agencies are hard at work finalizing the rule,” he said. “Once finalized, it is my hope and belief that this new CRA final rule, in parallel with the existing protections of the Fair Housing Act and ECOA, will support bank lending, investing, and services that meet the needs of all communities, including those that continue to be underserved.”
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Kyle Campbell
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As UK housing costs soar, anxiety grips homeowners and renters: ‘I’m in meltdown’
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LONDON — For Sadie James, the cost-of-living crisis in Britain just never seems to ease.
First, it was skyrocketing energy and food costs stemming from Russia’s invasion of Ukraine. Now, the 61-year-old worries whether she can keep a roof over her head.
James, who lives in south London, has struggled for years to stay on top of her finances. Just as she was starting to clear her debts, she’s back to square one: Her rent keeps rising, and on top of higher food and energy bills, her welfare payments just can’t keep up.
“I’m actually in a meltdown each time I think about it,” said James, who cannot work because of underlying health problems. “I’m literally depressed, I’m angry, I’m totally overwhelmed about it because I don’t want to lose my home.”
Interest rates have risen rapidly in recent months, which in turn have ratcheted up mortgages and rents across the United Kingdom. Rates have hit 5% after being below 1% for the past decade as the Bank of England has tried to bring down the highest inflation in the Group of Seven major economies.
As is often the case, the poorest households are bearing the brunt. The rate hikes have led to the biggest fall in household wealth in Britain since World War II, according to new research from the Resolution Foundation think tank.
Unlike the United States, where many mortgages are fixed for up to 30 years, U.K. homeowners are more exposed to changes in the cost of borrowing because a large percentage of them have loans that need to be renewed every two or five years.
Around 2.5 million such deals are due to expire by the end of next year, with around a million households facing a 500-pound ($655) monthly increase in their average mortgage repayments by 2026, Bank of England Gov. Andrew Bailey said.
That has put pressure on both Bailey and Prime Minister Rishi Sunak, whose hold on power is tenuous ahead of a likely general election next year. Making it more expensive to borrow is how higher interest rates help lower inflation — people potentially spend less, reducing demand and pressure on prices.
Though inflation has eased from a double-digit peak last year, it’s still stubbornly high at 8.7%, and the central bank is expected to keep hiking rates — already at a 15-year high. That has led to mounting fears of the economy sinking into recession.
Many landlords facing higher mortgage payments want to pass on those costs to renters. A dearth of rental options doesn’t help either.
James says her landlord, a London housing organization that manages affordable rental homes for lower-income tenants, has raised her rent yearly and most recently declared a 4% bump to 170 pounds ($223) a week. For James, who is barely managing to cover her other bills, the rent increases seem relentless and she is terrified of being evicted.
“It’s a nightmare, thinking they’re going to come one day … lock my door and I can’t get in,” she said.
Despite the sharp increase in mortgage rates, renters have struggled to afford their housing to a greater degree than homeowners, according to Britain’s statistics agency. Renters typically spend a higher proportion of their income on housing costs, it said.
Jon Taylor, a debt manager at the charity Christians Against Poverty who has helped James, said his organization has seen a large increase in the number of people in rental debt in the past two years. Almost half of the charity’s new clients seek help paying their rent.
“Already, the rent increases are astronomical here in London, and people can’t afford that,” he said. “There’s this group of people that would have just about been able to pay their rent, but it’s just not sustainable anymore. And so something’s got to give.”
The rising rates are not just affecting people on the breadline or on social welfare, he added. He’s also worried about workers who could easily be tipped into debt because they can’t cover the simultaneous increases in food, housing and energy bills seen since last year.
“I’m extremely concerned that we’re going to see more people coming to us saying, ‘We can’t pay the mortgage’ — people who you’d never have thought of needing that kind of help are now going to be struggling,” he said.
The interest rate hikes have sent the average two-year fixed mortgage rate to 6.66%, the highest since before the 2008 global financial crisis.
Joanne Barker-Marsh, a single mother who cares for her teenage son with special needs, is trying not to think about February, when her fixed-rate mortgage is up for renewal. She is bracing for her payment to more than double.
“I will fly by the seat of my pants,” Barker-Marsh said. “I can’t even address this right now because I am terrified.”
The 51-year-old from Rochdale, in northern England, lost her job during the pandemic and relies on social services payments. She spends a third of her state benefits on the mortgage.
“I don’t have any spare cash, I don’t know where we’re going next,” she said. “It will swallow up the majority of our social services payment.”
Bailey, the central banker, expressed hope that the country’s biggest banks are resilient enough to offer more help than they could before the global financial crisis. He said banks have more capital and are carrying far less debt than they did then, allowing them to offer struggling households more financial options.
Whatever options are available, the drip-drip of bad news doesn’t help those fretting about where the cost-of-living crisis will go next.
“I don’t have a chance to catch up, to get better, because next minute there’s something else,” James said. “And I don’t understand why.”
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As UK housing costs soar, anxiety grips homeowners and renters: ‘I’m in meltdown’
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LONDON — For Sadie James, the cost-of-living crisis in Britain just never seems to ease.
First, it was skyrocketing energy and food costs stemming from Russia’s invasion of Ukraine. Now, the 61-year-old worries whether she can keep a roof over her head.
James, who lives in south London, has struggled for years to stay on top of her finances. Just as she was starting to clear her debts, she’s back to square one: Her rent keeps rising, and on top of higher food and energy bills, her welfare payments just can’t keep up.
“I’m actually in a meltdown each time I think about it,” said James, who cannot work because of underlying health problems. “I’m literally depressed, I’m angry, I’m totally overwhelmed about it because I don’t want to lose my home.”
Interest rates have risen rapidly in recent months, which in turn have ratcheted up mortgages and rents across the United Kingdom. Rates have hit 5% after being below 1% for the past decade as the Bank of England has tried to bring down the highest inflation in the Group of Seven major economies.
As is often the case, the poorest households are bearing the brunt. The rate hikes have led to the biggest fall in household wealth in Britain since World War II, according to new research from the Resolution Foundation think tank.
Unlike the United States, where many mortgages are fixed for up to 30 years, U.K. homeowners are more exposed to changes in the cost of borrowing because a large percentage of them have loans that need to be renewed every two or five years.
Around 2.5 million such deals are due to expire by the end of next year, with around a million households facing a 500-pound ($655) monthly increase in their average mortgage repayments by 2026, Bank of England Gov. Andrew Bailey said.
That has put pressure on both Bailey and Prime Minister Rishi Sunak, whose hold on power is tenuous ahead of a likely general election next year. Making it more expensive to borrow is how higher interest rates help lower inflation — people potentially spend less, reducing demand and pressure on prices.
Though inflation has eased from a double-digit peak last year, it’s still stubbornly high at 8.7%, and the central bank is expected to keep hiking rates — already at a 15-year high. That has led to mounting fears of the economy sinking into recession.
Many landlords facing higher mortgage payments want to pass on those costs to renters. A dearth of rental options doesn’t help either.
James says her landlord, a London housing organization that manages affordable rental homes for lower-income tenants, has raised her rent yearly and most recently declared a 4% bump to 170 pounds ($223) a week. For James, who is barely managing to cover her other bills, the rent increases seem relentless and she is terrified of being evicted.
“It’s a nightmare, thinking they’re going to come one day … lock my door and I can’t get in,” she said.
Despite the sharp increase in mortgage rates, renters have struggled to afford their housing to a greater degree than homeowners, according to Britain’s statistics agency. Renters typically spend a higher proportion of their income on housing costs, it said.
Jon Taylor, a debt manager at the charity Christians Against Poverty who has helped James, said his organization has seen a large increase in the number of people in rental debt in the past two years. Almost half of the charity’s new clients seek help paying their rent.
“Already, the rent increases are astronomical here in London, and people can’t afford that,” he said. “There’s this group of people that would have just about been able to pay their rent, but it’s just not sustainable anymore. And so something’s got to give.”
The rising rates are not just affecting people on the breadline or on social welfare, he added. He’s also worried about workers who could easily be tipped into debt because they can’t cover the simultaneous increases in food, housing and energy bills seen since last year.
“I’m extremely concerned that we’re going to see more people coming to us saying, ‘We can’t pay the mortgage’ — people who you’d never have thought of needing that kind of help are now going to be struggling,” he said.
The interest rate hikes have sent the average two-year fixed mortgage rate to 6.66%, the highest since before the 2008 global financial crisis.
Joanne Barker-Marsh, a single mother who cares for her teenage son with special needs, is trying not to think about February, when her fixed-rate mortgage is up for renewal. She is bracing for her payment to more than double.
“I will fly by the seat of my pants,” Barker-Marsh said. “I can’t even address this right now because I am terrified.”
The 51-year-old from Rochdale, in northern England, lost her job during the pandemic and relies on social services payments. She spends a third of her state benefits on the mortgage.
“I don’t have any spare cash, I don’t know where we’re going next,” she said. “It will swallow up the majority of our social services payment.”
Bailey, the central banker, expressed hope that the country’s biggest banks are resilient enough to offer more help than they could before the global financial crisis. He said banks have more capital and are carrying far less debt than they did then, allowing them to offer struggling households more financial options.
Whatever options are available, the drip-drip of bad news doesn’t help those fretting about where the cost-of-living crisis will go next.
“I don’t have a chance to catch up, to get better, because next minute there’s something else,” James said. “And I don’t understand why.”
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The mortgage market isn’t sending the signal homebuyers need on affordability
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A new housing development built along a canal near the Mokelumne River is viewed on May 22, 2023, near Stockton, California.
George Rose | Getty Images
Lawrence Yun has as big a stake in the Federal Reserve’s moves as any economist: As the chief economist for the National Association of Realtors, his industry is a target of the Federal Reserve’s efforts to tame inflation with higher interest rates.
But the housing’s industry’s bigger problem right now may be the bond market, and specifically, spreads between treasuries and mortgage rates that suggests homebuyers’ economic challenges may not decline even as the Federal Reserve is nearing the end of its interest-rate hikes. There is a historically-wide difference between the 10-year treasury bond, a benchmark for pricing mortgages, and the actual price of an average 30-year loan. Usually around 1.75 percentage points, and as low as 1.3 in 2021, the so-called mortgage spread is hovering at more than 3 percentage points now. And that is propping up mortgage rates, keeping home owners from selling their homes and buying nicer ones, and hurting first-time buyers, Yun said.
“Buyers know 3.5% mortgages aren’t coming back,” Yun said. “So 5.5% would bring out buyers.”
Why mortgage spreads should move lower
Logically, mortgage spreads should move down sharply from here, thanks to the recent spate of good economic news, and bring relief to home buyers who have seen affordability deteriorate sharply since 2020.
Traditionally, spreads widen when markets fear a recession. They spiked before the financial crisis of 2008, for example. Collapsing spreads help revive housing activity after a recession arrives, or can prop up the housing market in a crisis, which happened in 2021 as the Covid pandemic threatened an economic crash. But as the Fed began raising interest rates in March 2022, mortgage rates rose even faster than bond yields.
The case for wide spreads this past year was two-fold. Partly, it was rooted in the idea that the 10-year treasury yield would rise as the Fed hiked more. Fear of a 2023 recession also contributed — evidenced by a sharp widening of spreads in March, after Silicon Valley Bank failed.
Now, both cases are evaporating. Last week’s inflation report showed consumer prices rose just less than 3% for the 12 months ending in June, down from more than 9% a year earlier. Low inflation should persist into the fall, because the government’s measure of housing inflation lags private market data that has been moving lower since last summer. The consumer price index is expected to only start to reflect the now year-old dip in rents and home prices in parts of the U.S. by year-end.
At the same time, the Atlanta Federal Reserve Bank’s tracking estimate of second-quarter economic growth now sits at 2.3% belying predictions of an early-2023 recession that were widespread.
The recent inflation news pushed the 10-year treasury lower, touching 3.76% after reaching 4.09% earlier in July. Mortgage rates also dropped, to 6.89% last Friday from a recent peak of 7.22%, according to Mortgage News Daily. But the spread between the two was little changed.
How much the big mortgage spread costs homeowners
If the spread between 10-year bonds and mortgages were to revert to normal, it would make a huge difference in monthly payments for home buyers.
On a $500,000 mortgage, for example, a 7% interest rate spits out a monthly payment of $3,327, plus taxes and insurance. That falls to $2,934 if rates go to 5.8%, which would represent a 2 percentage-point gap between treasuries and mortgage rates, and to $2,777 with mortgages at a spread of 1.5 percentage points — back within the range of the long-term average, 1.75 points.
The closing of spreads alone would save that borrower $6,600 a year in payments. A $500,000 loan would typically require about $150,000 in pretax annual income.
“People consider changing their cable company for $30 a month,” Yun said. “$600 a month is a big number.”
A narrowing of spreads last fall, which reversed in February and March, helped stabilize a falling real estate market, according to Logan Mohtashami, lead analyst for HousingWire in Irvine, Calif.
But bond market and housing experts are skeptical of whether the spreads will narrow, and mortgage rates fall, as fast as homebuyers might like.
The Fed is widely expected to raise the Fed funds rate at its meeting on July 25-26, with futures prices implying a 96.1% chance of a quarter-point increase, according to the CME Group Fedwatch Tool. That will support Treasury yields, at least in theory.
More than that, the Fed has stopped buying up mortgage securities as the bonds on its balance sheet mature. That depresses the price mortgages can command in secondary markets or from federally-backed loan buyers like Fannie Mae and Freddie Mac, and puts pressure on lenders to demand wider spreads from borrowers, said Rob Haworth, senior investment strategy director at U.S. Bank in Seattle.
Banks may also seek bigger spreads on loans made in the next few months because of the risk the mortgages will be repaid quickly when borrowers refinance next year as rates fall, he added.
“One might attribute it to quantitative tightening,” Haworth said. “The Fed is a seller.”
Indeed, the Fed has signaled that it doesn’t want mortgage rates to fall soon, according to Mohtashami, citing comments made by Minneapolis Federal Reserve Bank president Neel Kashkari who said in February that lower rates and a hotter market would “make our job harder” in controlling inflation.
“I assumed the spreads would stay high until the Fed cried Uncle and started cutting rates,” Mohtashami said. “If the banking crisis hadn’t happened in March, they would be lower.”
But markets have defied the Fed before, as recently as this week, when the 10-year Treasury yield dropped even as traders remain convinced the central bank will hike rates at least once more.
If the drop in inflation is sustained — a big if — and rising consumer confidence pushes any recession further into the future, markets are likely to reset interest rates with or without the central bank.
The Fed will raise rates at least once more, but the second rate increase many investors have expected may be delayed or canceled if inflation stays tame, said Doug Duncan, chief economist at Fannie Mae. That would let last week’s modest dip in mortgage rates continue, even though Fannie doesn’t expect the central bank to cut interest rates until at least early next year, he said.
How banks think about lending rates
Fannie Mae’s forecast calls for rates to be near current levels through 2023. But the Mortgage Bankers Association of America sees the 30-year rate dipping to 5.2 percent next year.
Banks’ reaction to changing spreads may be tricky to predict, Duncan said. On the one hand, banks would have to watch out for more prepayments if interest rates come back down, pressuring them to keep spreads wide, he said. But that might be overwhelmed by an increase in the value of mortgages that banks already own, as loans from the late 2010s and 2020 that pay lower rates regain value they lost as rates rose, he said. In that case, more banks would probably be more willing to let spreads fall, he added.
Mortgage rates could come down quicker than expected if banks respond to rising mortgage-bond values by relaxing spreads, Duncan said. When the Fed tried to talk markets into tightening credit in 2013, mortgage spreads actually became smaller, loosening mortgage credit, Haworth said.
“Unless rates go back to 3 percent, banks are still going to be better off, even if prepayments pick up,” Duncan said.
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Average long-term US mortgage rate surged to nearly 7% this week to highest level since November
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LOS ANGELES — The average long-term U.S. mortgage rate climbed this week to just under 7%, the highest level since November and the latest setback for homebuyers already grappling with a tough housing market constrained by a dearth of homes for sale.
Mortgage buyer Freddie Mac said Thursday that the average rate on the benchmark 30-year home loan rose to 6.96% from 6.81% last week. A year ago, the rate averaged 5.51%.
It’s the third consecutive week of higher rates, lifting the average rate to its highest level since it surged to 7.08% in early November. High rates can add hundreds of dollars a month in costs for borrowers, limiting how much they can afford in a market already unaffordable to many Americans.
The latest increase in rates follows a recent sharp upward move in the 10-year Treasury yield, which climbed above 4% last week for the first time since early March. The yield, which lenders used to price rates on mortgages and other loans, was down to 3.80% in midday trading Thursday following new data pointing to cooler inflation, which led bond traders to trim bets for more rate hikes by the Federal Reserve later this year.
On Wednesday, the U.S. government reported that inflation at the consumer level rose 3% in June from a year earlier, marking its lowest point since early 2021, though it remains above the Fed’s 2% target.
“Incoming data suggest that inflation is softening, falling to its lowest annual rate in more than two years,” said Sam Khater, Freddie Mac’s chief economist. “However, increases in housing costs, which account for a large share of inflation, remain stubbornly high, mainly due to low inventory relative to demand.”
High inflation has driven the Federal Reserve to jack up interest rates at a blistering pace. Beginning with its first hike in March 2022, the central bank has lifted its benchmark interest rate to about 5.1%, its highest level in 16 years, before forgoing a hike at its meeting of policymakers last month.
Mortgage rates don’t necessarily mirror the Fed’s rate increases, but tend to track the yield on the 10-year Treasury note. Investors’ expectations for future inflation, global demand for U.S. Treasurys and what the Fed does with interest rates can influence rates on home loans.
The average rate on a 30-year mortgage remains more than double what it was two years ago, when ultra-low rates spurred a wave of home sales and refinancing. The far higher rates now are contributing to the low level of available homes by discouraging homeowners who locked in those lower borrowing costs two years ago from selling.
The dearth of properties on the market is also a key reason home sales have been slow this year. Last month, sales of previously occupied U.S. homes were down 20.4% from as year earlier, marking 10 consecutive months of annual declines of 20% or more, according to the National Association of Realtors.
The average rate on 15-year fixed-rate mortgages, popular with those refinancing their homes, also rose this week, climbing to 6.30% from 6.24% last week. A year ago, it averaged 4.67%, Freddie Mac said.
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With house prices this high, boomers may want to become renters
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If you’re a retiree and you’re trying to square the circle of rising costs, longer lifespans, more expensive medical care and turbulent markets, don’t be afraid to run the numbers on your biggest investment.
That would be your home — if you own it.
U.S. house prices are now so high that it is almost impossible for seniors not to ask themselves the obvious question: “Should we cash in, invest the money, and rent?”
Right now the average U.S. house price is nearly $360,000. That’s about a third higher than just a few years ago, before the COVID-19 pandemic. The lockdowns, the panic, the stimulus checks and 2.5% mortgage rates have all passed into history. But the sky-high prices remain — for now.
After several years of double-digit percentage increases, apartment-rent growth is falling for only the second time since the 2008 financial crisis. WSJ’s Will Parker joins host J.R. Whalen to discuss.
At these levels, analysts at Realtor.com — which, like MarketWatch, is owned by News Corp.
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— say that in 45 out of 50 major U.S. metropolitan areas it is cheaper to rent than it is to buy a starter home. The Atlanta Federal Reserve Bank says national housing affordability is abysmal — about where it was in 2006 and 2007, during the big housing bubble.There is a similar story for seniors. Federal data show that the average U.S. house price is now nearly 17 times the average annual Social Security benefit — an even higher ratio than it was in August 2008, just before Lehman Brothers collapsed. At that juncture, the average house price was 15 times higher.
U.S. National Home Price Index vs. average rent of primary residence in U.S. city, according to the U.S. Bureau of Labor Statistics. Indexed: January 1987=100.
S&P/Case-Shiller
Our simple chart, above, compares average U.S. home prices with average U.S. rents, going back to 1987. (The chart simply shows the ratio, indexed to 100.) The bottom line? House prices are very high at the moment compared with rents — again, prices are about where they were in 2006-07.
And the two must run in tandem over the long term, because the economic value of owning a house is not having to pay rent to live there.
If there are times when, in general, it makes more financial sense for seniors to rent than to own, this has to be one of those.
Seniors who own their own homes may think high interest rates on new mortgages don’t affect them. They most likely either already have a mortgage at a lower, older rate or they’ve paid off their home loan. But if you want to sell, you’ll almost certainly be selling to someone who needs a mortgage.
If borrowing costs drive down real-estate prices, seniors who hold off on selling may miss out on gains they may never see again. After the last housing peak, in 2006, it took a full decade for prices to recover fully. Those who sold when the going was good had the chance to buy lifetime annuities at excellent rates or to invest in stocks and bonds that overall rose about 80% over the same period.
As I mentioned recently, there is a broad basket of real-estate trusts on the stock market that are publicly traded landlords. You can sell your home and invest in thousands at a click of a mouse.
But should you?
Incidentally, there is also an exchange-traded fund that invests in residential REITs, Armada’s Residential REIT ETF
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though in addition to single-family homes and apartment-complex operators, about 25% of the fund is invested in companies involved in manufactured-home parks and senior-living facilities.For each person, the math will be different, and there are a number of questions you need to ask. Where do you want to live? How much would you get if you sold your house? How much would you pay in taxes? How much would it cost to rent the right place? Do you want to leave a property to your heirs? And what would be the costs of moving — both financial and emotional?
The conventional wisdom is that you should own your home in retirement.
“I would advise any and all retirees against renting if at all possible,” says Malcolm Ethridge, a financial planner at CIC Wealth in Rockville, Md. “You need your costs to be as fixed as possible during retirement, to match your income being fixed as well. If you choose to rent, you’re leaving it up to your landlord to determine whether and by how much your No. 1 expense will increase each year. And that makes it very tough to determine how much you are able to allocate toward everything else in your budget for the month.”
A key point here, from federal data, is that nationwide rents have risen year after year, almost without a break, at least since the early 1980s. They even rose during the global financial crisis, with just one 12-month period where they fell — and then by only 0.1%.
“My general advice for clients is that owning a home with no mortgage in retirement is the best scenario, as housing is typically the highest cost we pay monthly,” says Adam Wojtkowski, an adviser at Copper Beech Wealth Management in Mansfield, Mass. “It’s not always the case that it works out this way, but if you can enter retirement with no mortgage, it makes it a lot easier for everything to fall into place, so to speak, when it comes to retirement-income planning.”
“Renting comes with a lot of risk,” says Brian Schmehil, a planner with the Mather Group in Chicago. “If you rent, you are subject to the whims of your landlord, and a high inflationary environment could put pressure on your finances as you get older.”
But it’s not always that simple.
“With housing costs as high as they are now though, renting may be a viable solution, at least for the moment,” says Wojtkowski. “We don’t know what the housing-market trends will be going forward, but if someone is waiting for a housing-market crash before they move, they could very likely be waiting for a long time. We just don’t know.”
“Any decision comes with pros and cons,” says Schmehil. “Selling when your home values are historically high and renting allows you to capture the equity in your home, which is usually a retiree’s largest or second-largest financial asset. These extra funds allow you to spend more money on yourself in retirement without having to worry about doing a reverse mortgage or selling later in retirement, when it may be harder for you to do so.”
Renting also allows you to be more flexible about where you live, for example nearer your children or grandchildren, he adds.
And as any experienced property owner knows, renting also brings another benefit: You no longer have to do as much work around the house.
“Renting is great in that you don’t need to maintain a residence,” says Ann Covington Alsina, a financial planner running her own firm in Annapolis, Md. “If the dishwasher breaks or the roof leaks, the landlord is responsible.”
Wojtkowski agrees, noting that many people no longer want to spend time mowing the lawn or shoveling snow in retirement. “Ultimately, one of the things that I’ve seen most retirees most concerned with is eliminating the general upkeep [and] maintenance of homeownership in retirement,” he says.
Several planners — including Covington Alsina and Wojtkowski — note that one alternative to selling and renting is simply downsizing. This can free up capital, especially when home prices are high, like now, without leaving you exposed to rising rents.
Many baby boomers have been doing exactly that.
Meanwhile, I am reminded of my late friend Vincent Nobile, who — after a long and fruitful life owning homes and raising a family — found himself widowed and alone in his 80s. He rented a small cottage on a New England sound and said how glad he was that he never had to worry about maintaining the roof or the appliances, or fixing the plumbing or the heating, or any one of a thousand other irritations. Or paying property taxes — which go down even more rarely than rents.
When the regular drives to Boston got too onerous, he moved into the city and rented there. And he was glad to do it. The money he had made was all in investments — a lot less hassle both for him and his heirs.
I once asked him if he would prefer to own his own home. He shook his head and laughed.
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Elevated mortgage rates are leading to sharply higher monthly payments even as home prices ease
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LOS ANGELES — Would-be homebuyers are willing to take on sharply higher mortgage payments, even as home prices have begun to pull back this year.
The median monthly payment listed on applications for home purchase loans jumped 14.1% in May from a year earlier to an all-time high $2,165, according to the Mortgage Bankers Association. The May figure also represents a 2.5% increase from April.
“Homebuyer affordability eroded further in May as prospective buyers continue to grapple with high interest rates and low housing inventory,” Edward Seiler, the MBA’s associate vice president of housing economics, said in a release last week.
The size of the mortgage and the interest rate on the loan influence how large the monthly payment on a 30-year fixed-rate mortgage will be. Those two housing market variables have ballooned in recent years.
Home price growth accelerated during the pandemic, fueled by ultra-low mortgage rates and bidding wars as competition for relatively few properties on the market intensified. Even after the market cooled last summer as the Federal Reserve raised interest rates in its bid to slow economic growth and tame inflation, home price appreciation remained resilient until this February, when the median U.S. home price slipped 0.2% from a year earlier — its first annual decline in 13 years, according to the National Association of Realtors.
Home prices have kept falling since, most recently sliding 3.1% in May from a year earlier to a median $396,100, according to the NAR.
Still, the national median home price remains nearly 40% higher than it was three years ago. Meanwhile, the average rate on a 30-year home loan climbed to a new high for the year this week at 6.81%, mortgage buyer Freddie Mac said Thursday. That’s more than double what it was two years ago.
The combination, along with a stubbornly low level of homes for sale, is driving mortgage payments higher, pushing the limits of what many homebuyers can afford.
Consider that two years ago the median national monthly payment on home loan applications was $1,320.48, or 63.4% less than what it was last month.
A recent forecast by Realtor.com calls for the average rate on a 30-year mortgage to drop to 6% by the end of the year. Lower rates could motivate some homeowners to sell, adding more sorely needed inventory to the market. However, lower rates could also spur more buyers to come off the sidelines, which would heighten competition and push up prices.
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Should You Always Accept The Highest Bid On Your Home? Here’s A Hint: No
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Happy african husband biracial wife couple sit at table near computer make fists yes gesture … [+]
It’s still a seller’s market, and the combination of increased buyer demand and a shortage of housing means you’re definitely on the winning side of the law of supply and demand. In fact, you may end up with several competing offers as buyers try to outbid each other.
However, it turns out that you shouldn’t always accept the highest bid on your home. In fact, Jonathan Self, a licensed Compass real estate broker in Chicago, IL, tells us that on several occasions, he’s advised clients to take an offer that appeared less attractive on the surface. “I uncovered red flags in the buyer interview/showing process that I had to discuss as a fiduciary to my clients, the sellers.”
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And even though a higher offer might sound appealing, Self explains that it’s just “theoretical money” until the wire lands in your account. “In my market, multiple offers are common on quality, well-priced homes – and it actually fosters an environment perfect for missteps.”
He says a competitive buyer might offer you the moon, but it’s your job (with the help of your realtor) to determine if the buyer can actually deliver.
Jason Gelios, a realtor at Community Choice Realty in Detroit, agrees that you shouldn’t hone in on the price alone. “When reviewing multiple offers, home sellers should take into account all of the details to determine which is best for them,” he says. “Home sellers typically choose convenience over a higher-priced offer because it could mean fewer headaches during the process.”
So, what type of headaches are we talking about? Our team of experts broke down some of the factors you may want to consider before accepting the highest bid on your home.
Contingencies Based on Appraisals
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Most people (should) set the home’s selling price based on several factors, including market value and comps. However, Mike Jones, broker/owner at RE/MAX At The Crossing in Indianapolis, IN, tells us, “An unfortunate tactic that is being used in today’s market is buyers offering way higher than list price to get the sellers to accept a higher offer – but if that offer is based on the buyer obtaining financing, it could require an appraisal to support the accepted value.” And if the appraisal doesn’t support the accepted value, he says the buyer may back out of the deal unless you agree to lower the price.
And, that’s why Glen Pizzolorusso, a real estate broker with West View Properties in Watertown, CT, advises sellers to closely view the appraisal language when a buyer is financing the property. “A mortgage company, regardless of the price, will require an appraisal, and if the sales price is $700,000, and the appraisal comes in at $650,000, the bank will only lend on the $650,000.”
Pizzolorusso says this is where an appraisal gap letter is used. “It tells my sellers that the buyer is willing to cover any difference between the house’s appraised value and the offer price they submitted.”
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Contingencies Based on Inspections
The home inspection could also lower the asking price. For example, agent Robert Elson of Coldwell Banker Warburg in New York, NY, tells us that a leaky roof could reduce that higher offer. If the lower offer waives the inspection contingency, that could result in huge savings for the seller. “So, moral of the story is that sellers should look at all aspects of an offer, because the paradox is that more money does not always translate to more money – it’s caveat emptor in reverse – seller beware,” Elson says.
And, here’s something else to consider: if you have been negligent in maintaining your property, Patrick Garrett, broker/owner at H & H Realty in Trussville, AL, tells us that there are certain loan types that will require seller repairs before a buyer can acquire a clear to close on the property. “In this scenario, it is in the seller’s best interest to accept a lower cash offer or accept an offer where the buyer has a mortgage approval that allows for repairs to be completed post-closing,” he explains.
Broker Kimberly Jay of Compass in New York, NY, wholeheartedly agrees with this strategy if you have issues with your home that will come to light and need to be addressed. “If you have another offer without this contingency, it may be better for you to get to the closing table with that buyer instead.”
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According to Pizzolorusso, an as-is offer beats one with an inspection, but with the latter, pay attention to the language. For example, when he’s representing buyers in a multiple-offer situation, Pizzolorusso makes sure to include language that tells the sellers they will not nitpick little things. “We are only concerned with significant ticket items that were not visible when we toured the property – so the wording is something like ‘Buyer will conduct an inspection, within 72 hours of offer acceptance, for major structural, mechanical, health and safety issues only.’”
Using this type of language protects the buyer, and also lets the sellers know they’re not trying to negotiate on small items. “So, we may see a cash offer 20% over the asking price with standard inspection language, and accept an offer with financing that is 15% over the asking price but waives the inspection,” Pizzolorusso explains.
Unsubstantiated Cash Offers
A cash offer can be ideal for sellers, compared to an offer that requires financing. “A higher offer that comes with a mortgage contingency may not be higher at all,” warns Elson, who is a fan of cash deals. He explains, “Cash deals are quick, time is money, and banks take their time.” So, if it takes 30 to 60 days for the bank to make a decision regarding the buyer’s mortgage, and the buyer ends up getting turned down, he says the seller ends up with nothing and has to restart the process again.
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On the other hand, the saying, “cash is king” isn’t always true. “The risk factor of a cash offer is generally less because there is no contingency for the buyer to get financing,” explains Bill Golden, a realtor-associate broker at Keller Williams Realty Intown Atlanta, GA. However, if you’re considering a cash offer, he says the buyer needs to provide some sort of ‘proof of funds’ to show that they have the ability to pay cash for the property.
Risky Financing Scenarios
The type of loan the buyer has can also make a difference when weighing offers. “I’ve seen home sellers choose an offer that was less than the highest bid, simply because it came with conventional financing, which has less hurdles compared to, let’s say, an FHA financed offer,” says Gelios.
The type of lender is indeed important, and Self says it should be a reputable lender with appraisers that live in the area. “Do they have in-house underwriting, and has their agent checked to see if the lender verified income and assets?” He also warns sellers to be cautious. “Some buyers may also try to pull a switcheroo and suddenly want to use an internet site, like Bob’s Cut Rage Mortgage Barn (fictitious title) – which is a red flag.”
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Golden totally agrees that a buyer using a trusted source is not as much of a risk as one using a lender that was randomly selected on the Internet. “Also, as with an anonymous Internet lender, sometimes a mortgage from a big-box bank can be slow and cumbersome, if the buyer does not have a familiar contact at the bank who has decision-making authority and is invested in moving the loan forward timely,” Golden explains.
These are some other financing scenarios to consider as well. For example, Golden says the more the buyer puts down on the mortgage, the easier it will be for that person to qualify for a mortgage. “In other words, someone putting down 50% of the sales price on the mortgage will have a much easier time getting a mortgage than someone putting down 5%.”
Pizzolorusso says the person with more “skin in the game” (like a higher down payment) has a higher probability of closing on time. “So, if we receive an offer with zero down that is 10% higher than a cash offer, I discuss the probability of closing with my sellers,” he says, which can help to manage their expectations.
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And here’s something else to consider. According to Jay (who lives in NYC), there are many co-ops in Manhattan. “If you’re selling this type of property, the buyer will need to have the financing qualifications to pass the board.”
Timetable for Closing
Another factor that may be more important than money is the time frame for closing. “If the offer includes a non-negotiable closing date that is too soon or too far away, consider other offers that are lower but meet your closing date needs,” advises Candice Williams, a realtor at Coldwell Banker Realty in Houston.
Timing is so important that Golden is noticing a new trend in this competitive market. “Buyers are allowing sellers to stay after closing for a designated amount of time that suits the sellers’ needs, sometimes even at no cost.” He says this can be worth a lot to a seller, especially if it helps them avoid having to move twice.”
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On the other hand, timing can also be important for another reason. “If the home seller needs to close as quickly as possible due to risk of foreclosure or due to time constraints related to a contractual agreement on another property, a cash buyer at a lower purchase price might be the best option to alleviate the risk of any closing delays,” explains Garrett. Even with higher offers on the table, he says the person providing the quickest closing date may be chosen.
Request to Pay Closing Costs
When determining if an offer truly is the highest bid, Williams advises sellers to consider if the sellers need to pay anything toward the closing costs, since this reduces the amount of the offer. “For example, if one offer is $400,000, but asks the seller to pay $10,000 in the buyer’s closing costs, the offer is really $390,000,” she says. “If the other offer is $395,000, but does not ask for any closing cost contributions from the seller, this offer is $5,000 higher than the first offer.”
Questionable Buyers and Motives
Finally, there’s another category of reasons why you might hesitate to accept the highest bid on your home. If the offer is significantly higher, Jay warns that these individuals may be trying to test the water and they’re not serious buyers.
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According to Agent Jeremy Kamm of Coldwell Banker Warburg in New York, NY, that’s why the buyer’s profile and financial well-being are so important. “If the highest offer comes from a questionable buyer, then it cannot be considered the strongest or most compelling offer.” And when there are multiple bids, Kamm warns that it’s critical that each buyer’s genuine interest level to move forward be properly assessed. “The worst thing that could potentially happen is that after accepting a bid, the buyer walks away, and you are forced to go back to the pool of buyers whose offers were originally passed on.”
It’s also possible that the person making the offer isn’t even the actual decision-maker. For example, it could be the buyer’s parents who are paying for the house – and they may live in another state. “I had a deal fall apart in a vintage condo because the mom showed up at the inspection and thought the floors were too squeaky,” Self explains.
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Terri Williams, Contributor
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Mortgage demand grows, driven by sales of new homes
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A home is constructed at a housing development on June 21, 2023 in Lemont, Illinois.
Scott Olson | Getty Images
Mortgage rates turned higher again last week. But the increase did not cut into mortgage demand, as buyers sought newly built homes.
Total mortgage application volume rose 3% compared with the previous week, according to the Mortgage Bankers Association’s seasonally adjusted index. An additional adjustment was made for the Juneteenth holiday.
Applications for a mortgage to purchase a home rose 3% for the week but were 21% lower year over year. These applications have increased for three straight weeks to the highest level since early May, despite still-high mortgage rates.
“New home sales have been driving purchase activity in recent months as buyers look for options beyond the existing-home market,” said Joel Kan, MBA’s vice president and deputy chief economist, in a release. “Existing-home sales continued to be held back by a lack of for-sale inventory as many potential sellers are holding on to their lower-rate mortgages.”
Sales of newly built homes in May soared 12% compared with April and were 20% higher than May 2022, according to a report Tuesday from the U.S. Census. Builders are driving demand in part by offering incentives, like paying down mortgage rates.
Last week the average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($726,200 or less) increased to 6.75% from 6.73%, with points remaining at 0.64 (including the origination fee) for loans with a 20% down payment. The average rate for 30-year fixed-rate mortgages with jumbo loan balances (greater than $726,200) increased more sharply to 6.91% from 6.80%.
“The spread between the jumbo and conforming rates widened to 16 basis points, the third week in a row that the jumbo rate was higher than the conforming rate,” Kan said. “To put this into perspective, from May 2022 to May 2023, the jumbo rate averaged around 30 basis points less than the conforming rate.”
The widening spread and the increase in the jumbo rate stem from the recent regional bank failures. Lenders hold jumbo loans on their balance sheets, because Fannie Mae and Freddie Mac don’t buy loans of that size. Bank credit, especially at community banks, has tightened substantially, resulting in higher rates.
Applications to refinance a home loan rose 3% for the week but were 32% lower than the same week one year ago. The vast majority of borrowers today have mortgages with interest rates below 4%.
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CNBC Daily Open: Tech, meet reality
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[ad_2]A shopper stands in front of a Tesla Motors showroom at a retail shopping mall in Hong Kong.
Sebastian Ng | Sopa Images | Lightrocket | Getty Images
This report is from today’s CNBC Daily Open, our new, international markets newsletter. CNBC Daily Open brings investors up to speed on everything they need to know, no matter where they are. Like what you see? You can subscribe here.
What you need to know today
Tech sell-off
Major U.S. indexes fell Monday, dragged down by a sell-off in technology stocks. Stock futures, however, inched up. Markets in Asia-Pacific traded mixed Tuesday. Japan’s Nikkei 225 fell for the fourth straight day, but analysts think the rally in Japanese stocks, which began in late May, isn’t a bubble like the one that burst in 1990.Leaders speak
In his first televised address since the Wagner Group marched on Moscow, Russian President Vladimir Putin said organizers of the armed mutiny will be “brought to justice” and that his military would have crushed the rebellion. Separately, U.S. President Joe Biden said the U.S. “had nothing to do with [the events], this was part of a struggle within the Russian system.”Microsoft wants explosive growth
Microsoft CEO Satya Nadella wants the tech giant to hit $500 billion in revenue by fiscal 2030, according to a court filing. That’s more than double its $198.26 billion in revenue for 2022, implying revenue growth of at least 10% per year. Indeed, Nadella sketched out a “20/20” goal, which involves growing revenue and operating income by 20% year over year.On track for 5%
China is on track to hit its annual growth target of “around 5%,” said Chinese Premier Li Qiang at the World Economic Forum’s Annual Meeting of the New Champions. China’s economy has been struggling lately, with economic activity growing slower than expected in May. Separately, Aramco’s CEO Amin Nasser thinks oil demand from China and India will continue growing and prop up the market this year.[PRO] Imminent drop in the S&P?
Mile Wilson, Morgan Stanley’s chief U.S. equity strategist, thinks the “risks for a major correction [in the stock market] have rarely been higher” because of four factors that will weigh down on markets. Wilson, who predicted the fall in markets last year, thinks the S&P 500 will drop to 3,900 in the fourth quarter. That’s around 10% lower from its Monday close, among the most bearish outlooks on Wall Street.The bottom line
The attempted insurrection in Russia across the weekend dominated headlines, but it didn’t seem to occupy investors’ minds. Instead, “macro factors are likely to remain the main drivers of risk assets,” wrote Barclays’ Global Chairman of Research Ajay Rajadhyaksha in a Monday note.
Indeed, tech stocks slumped across the board as investor enthusiasm over artificial intelligence fizzled out and was replaced by a more clear-eyed view of today’s economic conditions.
Alphabet fell 3.27% after UBS downgraded the company, citing stiff competition in the AI sector. Nvidia and Meta fell in sympathy, losing more than 3% each. But that wasn’t as bad as Tesla’s plunge of 6.06% after Goldman Sachs downgraded the electric car maker because of a “difficult pricing environment for new vehicles.”
The sell-off in tech put pressure on the Nasdaq Composite, which sank 1.16%. The S&P 500 fell 0.45% while the Dow Jones Industrial Average dipped 0.04%.
There might be more pain to come. The tech rally is “running out of steam,” according to Berenberg, a German bank. Tech, as a future-oriented sector, needs lower interest rates if it wants to continue rising.
But with the Federal Reserve emphasizing it’d keep rates high for now, lower rates would imply “a sharp economic slowdown,” Jonathan Stubbs, equity strategist at Berenberg, wrote. Stubbs mentioned that such a scenario would “be to tech’s disadvantage,” but, really, no one would benefit from it.
Nonetheless, with just a few days left before June ends, the three major indexes are poised to finish the second quarter higher. The recession is still months away, it seems — as it’s been for the past year. Fingers crossed we manage to elude it for so long that it gets tired of catching up with us.
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CNBC Daily Open: Tech confronts reality
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[ad_2]A Tesla Inc. store in Beijing, China, on Wednesday, May 31, 2023.
Bloomberg | Getty Images
This report is from today’s CNBC Daily Open, our new, international markets newsletter. CNBC Daily Open brings investors up to speed on everything they need to know, no matter where they are. Like what you see? You can subscribe here.
What you need to know today
Tech sell-off
Major U.S. indexes fell Monday, dragged down by a sell-off in technology stocks. Stock futures, however, inched up. European markets traded mixed. The pan-European Stoxx 600 dipped 0.1%, continuing its five consecutive days of falling last week, even as S&P Global Ratings doubled its 2023 gross domestic product forecast for the euro zone from 0.3% to 0.6%.Leaders speak
In his first televised address since the Wagner Group marched on Moscow, Russian President Vladimir Putin said organizers of the armed mutiny will be “brought to justice” and that his military would have crushed the rebellion. Separately, U.S. President Joe Biden said the U.S. “had nothing to do with [the events], this was part of a struggle within the Russian system.”A ‘mortgage catastrophe’
The U.K. is facing a “mortgage catastrophe,” warned the country’s shadow finance minister. The Bank of England’s 50 basis points rate hike last week will push mortgages up. That, in turn, will bring the number of households without savings by the end of the year to 7.8 million, or 30% of households nationwide, estimated the National Institute of Economic and Social Research, an independent think tank.Apple’s new shoots
Apple’s new Vision Pro headset aside, the tech company is reportedly planning to refresh all its major products in the next 12 months. On track to be released are a second version of the Apple Watch Ultra, a new 30-inch iMac (which would be the company’s largest all-in-one desktop to date), iPad Pros with OLED screens, MacBook Pros equipped with Apple’s new M3 chip, among other products.[PRO] Imminent drop in the S&P?
Mile Wilson, Morgan Stanley’s chief U.S. equity strategist, thinks the “risks for a major correction [in the stock market] have rarely been higher” because of four factors that will weigh down on markets. Wilson, who predicted the fall in markets last year, thinks the S&P 500 will drop to 3,900 in the fourth quarter. That’s around 10% lower from its Monday close, among the most bearish outlooks on Wall Street.The bottom line
The attempted insurrection in Russia across the weekend dominated headlines, but it didn’t seem to occupy investors’ minds. Instead, “macro factors are likely to remain the main drivers of risk assets,” wrote Barclays’ Global Chairman of Research Ajay Rajadhyaksha in a Monday note.
Indeed, tech stocks slumped across the board as investor enthusiasm over artificial intelligence fizzled out and was replaced by a more clear-eyed view of today’s economic conditions.
Alphabet fell 3.27% after UBS downgraded the company, citing stiff competition in the AI sector. Nvidia and Meta fell in sympathy, losing more than 3% each. But that wasn’t as bad as Tesla’s plunge of 6.06% after Goldman Sachs downgraded the electric car maker because of a “difficult pricing environment for new vehicles.”
The sell-off in tech put pressure on the Nasdaq Composite, which sank 1.16%. The S&P 500 fell 0.45% while the Dow Jones Industrial Average dipped 0.04%.
There might be more pain to come. The tech rally is “running out of steam,” according to Berenberg, a German bank. Tech, as a future-oriented sector, needs lower interest rates if it wants to continue rising.
But with the Federal Reserve emphasizing it’d keep rates high for now, lower rates would imply “a sharp economic slowdown,” Jonathan Stubbs, equity strategist at Berenberg, wrote. Stubbs mentioned that such a scenario would “be to tech’s disadvantage,” but, really, no one would benefit from it.
Nonetheless, with just a few days left before June ends, the three major indexes are poised to finish the second quarter higher. The recession is still months away, it seems — as it’s been for the past year. Fingers crossed we manage to elude it for so long that it gets tired of catching up with us.
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Mortgage catastrophe brews in Britain as millions are pushed toward insolvency
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U.K. Prime Minister Rishi Sunak conceded shortly after the BOE’s rate hike that the government’s mission to halve inflation to 5% by the end of the year had recently become more difficult.
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There is intensifying pressure on Britain’s government to do more to help struggling households, with the country’s shadow finance minister warning of a “mortgage catastrophe” as millions are pushed to the brink of insolvency.
The Bank of England last week hiked interest rates by 50 basis points to 5%, a bigger increase than many had expected. The BOE’s 13th consecutive rate rise takes the base rate to the highest level since 2008.
The surprise move — which is designed to lower inflation — will affect millions of homeowners as the interest rates on many mortgages in the U.K. are directly linked to the central bank’s base rate. Renters, too, are likely to see their payments increase as buy-to-let landlords pass on higher mortgage repayments.
Research by the National Institute of Economic and Social Research, a leading independent think tank, estimated that the BOE’s latest interest rate hike would see 1.2 million U.K. households (4% of households nationwide) run out of savings by the end of the year because of higher mortgage repayments.
That would take the proportion of insolvent households to nearly 30% (roughly 7.8 million), NIESR said last week, with the largest impact set to be incurred in Wales and the northeast of England.
“The rise in interest rates to 5% will push millions of households with mortgages towards the brink of insolvency,” said Max Mosley, an economist at NIESR. “No lender would expect a household to withstand a shock of this magnitude, so the government shouldn’t either.”
Credit scores and grace periods
U.K. Finance Minister Jeremy Hunt on Friday met with major banks and building societies to discuss the deepening mortgage crisis in the country.
Hunt said Friday that three measures had been agreed with the banks, mortgage lenders and the Financial Conduct Authority, including a temporary change to mortgage terms and a promise that consumers’ credit scores would not be affected by discussions with their lender.
The minister also said that for those at risk of losing their home, lenders agreed to a 12-month grace period before there’s a repossession without consent.
The Resolution Foundation says current market pricing suggests that households remortgaging in 2024 are poised for an annual mortgage bill rise of approximately £3,000 ($3,813) or more on average.
Christopher Furlong | Getty Images News | Getty Images
“These measures should offer comfort to those who are anxious about high interest rates and support for those who do get into difficulty,” Hunt said.
“We won’t flinch in our resolve because we know that getting rid of high inflation from our economy is the only way that we can ultimately relieve pressure on family finances and on businesses,” he added.
Rachel Reeves, shadow finance minister for the opposition Labour Party, criticized what she described as the government’s “chaotic approach” to the mortgage crisis.
“Unlike this government, Labour will not stand by as millions face a mortgage catastrophe made by the Tories in Downing Street,” Reeves said via Twitter on Thursday.
There’s a lot of mortgage pain coming, and much of it will arrive during the run-up to a 2024 election.
Torsten Bell
Chief executive of the Resolution Foundation
U.K. Prime Minister Rishi Sunak conceded shortly after the BOE’s rate hike that the government’s mission to halve inflation to 5% by the end of the year had become more difficult.
“I always said this would be hard — and clearly it’s got harder over the past few months — but it’s important that we do do that,” Sunak said Thursday at The Times CEO summit.
“The government is going to remain steadfast in its course and stick to its plan,” he added.
‘There’s a lot of mortgage pain coming’
BOE Governor Andrew Bailey said Thursday’s interest rate rise was necessary to continue the fight against stubbornly high inflation.
Official figures published ahead of the BOE’s meeting showed annual inflation rose by 8.7% in May, exceeding expectations. It means consumer prices remain at a level far above the BOE’s 2% target.
“We know this is hard — many people with mortgages or loans will be understandably worried about what this means for them,” Bailey said. “But if we don’t raise rates now, it could be worse later.”
The Resolution Foundation, a think tank focused on issues facing low- and middle-income households, has since warned that even with the latest rate rise, the problems for borrowers are far from over.
It says current market pricing suggests that households remortgaging in 2024 are poised for an annual mortgage bill rise of approximately £3,000 ($3,813) or more on average.
“There’s a lot of mortgage pain coming, and much of it will arrive during the run-up to a 2024 election,” said Torsten Bell, chief executive of the Resolution Foundation.
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Home sales barely budge from April to May in sluggish spring market
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A sign is posted in front of a home for sale on June 09, 2023 in San Francisco, California.
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Sales of previously owned homes were essentially flat in May compared with April, according to the National Association of Realtors.
They rose 0.2% to a seasonally adjusted, annualized pace of 4.30 million units. Compared with a year earlier, however, sales were 20.4% lower.
The slow spring sales pace is a combination of still-high prices, elevated mortgage rates and a critical shortage of homes for sale.
There were just 1.08 million homes on the market at the end of May. That’s 6.1% lower than the supply in May of last year. At the current sales pace that represents a three-month supply. Six months is considered a balanced market. Before the Covid pandemic hit, there were nearly twice as many homes on the market.
“Newly constructed homes are selling at a pace reminiscent of pre-pandemic times because of abundant inventory in that sector,” Lawrence Yun, chief economist for the NAR, said in a release. “However, existing-home sales activity is down sizably due to the current supply being roughly half the level of 2019.”
May sales are based on closings – that is, homes that likely went under contract in March and April. Mortgage rates were choppy during that period. The average contract interest rate on the popular 30-year fixed mortgage started March over 7%, then dropped sharply close to 6% briefly before then heading higher again, spending most of April around 6.5%.
Strong demand has kept a floor under home prices, which would normally drop more given the slow sales pace. The median price of an existing home sold in May was $396,100, which is 3.1% lower than May 2022. Prices rose in the Northeast and Midwest but fell in the South and West.
This is the largest price drop in just over a decade, but it is a median measure, which skews the price toward the type of home that is selling the most.
Right now, lower-priced homes are seeing the most activity. While sales of homes in all price tiers are now lower compared with a year ago, sales of homes priced between $250,000 and $500,000 were down 12%. But sales of homes priced between $750,000 and $1 million were down 21%. Other price indexes that measure repeat sales of similar homes are showing prices rising again.
The pull between strong demand and tight supply is keeping the market competitive. Nearly a third of properties sold above list price. Properties remained on the market for 18 days in May, down from 22 days in April but up from 16 days in May 2022. Nearly three-quarters of the homes sold in May were on the market for less than a month.
“With fewer homeowners poised to become sellers in 2023, buyers have a tough road ahead,” said Danielle Hale, chief economist for Realtor.com. “Our revised 2023 outlook expects that there will be some positives, namely, a gradual decline in mortgage rates beginning midyear and a continued softness in home prices that will start to stabilize high housing costs.”
The start of the summer housing season is shaping up much like the spring, with slower sales due to lack of supply. In a separate report from Redfin, a real estate brokerage, pending home sales fell 16% from a year earlier during the four weeks ended June 18. Pending sales are based on signed contracts, not closings.
Despite slower sales, Redfin’s measure of requests for tours and other early stage buying services is up 11% year over year. There are simply more buyers than homes for sale, as new listings are down 24% from a year ago, and the total number of homes for sale is down 8%, the biggest drop in over a year.
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Demand for mortgages stays flat despite a decline in rates
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CNBC’s Diana Olick joins ‘The Exchange’ to discuss a three-week decline in mortgage rates, a subdued demand for mortgages, and a rise in jumbo loan rates.
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CNBC Daily Open: China, the dozing dragon
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[ad_2]General view of the financial district of Lujiazui in Pudong district in Shanghai on April 12, 2023.
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This report is from today’s CNBC Daily Open, our new, international markets newsletter. CNBC Daily Open brings investors up to speed on everything they need to know, no matter where they are. Like what you see? You can subscribe here.
What you need to know today
Blinken unexpectedly meets Xi
U.S. Secretary of State Antony Blinken ended his China visit by meeting with Xi Jinping, the country’s president. The meeting was initially unconfirmed, suggesting that it’s a small step in repairing frayed U.S.-China ties. Blinken’s meeting could pave the way for U.S. President Joe Biden to meet Xi in November.Falling in tandem
U.S. markets were closed Monday to commemorate Juneteenth, the day when slavery in America ended, but stock futures slipped slightly. European stocks traded lower yesterday. In a worrying sign, both stocks and bonds simultaneously fell in the U.K. The FTSE 100 lost 0.71% even as the yield on the country’s 2-year government bond hit a 15-year high of 5.077%.Buffett bets on the house(s)
Warren Buffett’s Berkshire Hathaway increased its stake in five Japanese trading houses. The company now owns more than 8.5%, on average, of Itochu, Marubeni, Mitsubishi, Mitsui and Sumitomo. Berkshire really believes in Japan: Those stocks, in aggregate, are the most valuable Berkshire holds in any country outside the U.S.UK mortgage meltdown
Two-year fixed mortgage rates in the U.K. spiked to 6.01%, the highest since November 2008 — discounting an anomalous jump in December just months after the U.K. government announced its disastrous “mini-budget.” The country’s mortgage market’s so volatile that HSBC temporarily stopped offering some home loans earlier this month.[PRO] Riding the Asian wave
The MSCI Asia Pacific equities index has risen more than 25% from its low last October amid investor enthusiasm in the region. Morgan Stanley picks five of its favorite Asian stocks and thinks all could rise by at least 50% over the next 12 months — with one having a 67% upside.The bottom line
Since U.S markets were closed yesterday, let’s take a quick look at the second-largest economy of the world: China. Spoiler alert: it isn’t a pretty picture.
Back in January, when China abruptly abandoned its “zero-Covid” policy, analysts were by equal measures worried and excited. Worried, because a massive economic engine suddenly roaring back to life could stoke the flames of inflation even higher. Analysts braced for higher commodities and oil prices. On the other hand, many saw China as a potential driver of a global economy that had lost its way. To quote Standard Chartered Chairman José Viñals: “The Chinese economy is going to be on fire and that’s going to be very, very important for the rest of the world.”
At approximately the halfway mark of the year, here’s how China’s stacking up against those expectations. In short: It seems everyone’s wrong about China. Instead of turning up the heat of inflation, China’s combating a potential deflationary problem domestically. The country’s consumer price index rose only 0.2% year over year, while its producer price index plummeted 4.6%. Recent economic data’s been so disappointing that Wall Street banks have started to cut their expectations of China’s economic growth this year — though their projections are, optimistically, still higher than the country’s own target of “around 5%.” Meanwhile, oil prices have been sliding despite Saudi Arabia announcing surprise cuts to production, and iron ore prices aren’t doing so hot either because China’s demand for steel is projected to fall.
China’s economy, to put it plainly, isn’t doing so well. It’s true things might turn around: The country’s central bank has started cutting rates, and analysts think fiscal stimulus is on its way. But for now, the Chinese dragon’s still dozy — and things are starting to feel a little too chilly.
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Mortgage points may help homebuyers lower monthly costs amid high interest rates. How to know if this strategy is right for you
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As interest rates have climbed, homebuyers have been confronted with higher borrowing costs.
That has led more home purchasers to opt for one strategy, purchasing mortgage points, as a way to defray higher monthly payments.
Mortgage points let buyers pay an upfront fee to lower the interest rate on their loans. In some cases, sellers will help to buy down rates to help ease transaction costs.
Almost 45% of conventional primary home borrowers bought mortgage points in 2022 to reduce their monthly mortgage payments, a trend that has continued into this year, according to recent research from Zillow.
That is up from 29.6% in 2021, when interest rates were lower.
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Here’s the inflation breakdown for May 2023, in one chart
The rich often misjudge the potency of their retirement savingsThe 30-year fixed-rate mortgage currently averages 6.7% according to Freddie Mac, up from 5.8% a year ago. The 15-year fixed-rate mortgage now averages about 6%, up from 4.8% a year ago.
This week, the Federal Reserve decided to pause the interest rate hikes it has put in place to combat high inflation.
As rates stay higher, those who are in the market for a home lose purchasing power. Some experts have urged buyers to consider purchasing mortgage points to lower their monthly payments.
Stephanie Grubbs, a licensed real estate agent at the Zweben team at Douglas Elliman Real Estate in New York, recently did exactly that when one of her clients lowered their asking price.
“This fabulous apartment just had a price reduction, which means you can use those savings to buy down your rate,” Grubbs wrote in the updated ad.
Grubbs, a former financial advisor, said her firm started bringing up the strategy more when the Fed started hiking interest rates.
“In an effort to try to be creative, we talk to sellers about offering to buy down a rate,” Grubbs said.
Other experts say buyers purchasing mortgage points can be a great strategy for the right situation.
That goes particularly if a buyer can afford the extra upfront costs.
Being able to lower that monthly payment can really help give some more wiggle room in people’s budgets and help them reach affordability.
Nicole Bachaud
senior economist at Zillow
Mortgage points refer to the percentage amount of the loan. Typically, one point is worth 1% of the loan value, according to Nicole Bachaud, senior economist at Zillow.
If the loan value is $300,000, one point would typically cost $3,000 and lower the interest rate 0.25 percentage points, she said.
“Being able to lower that monthly payment can really help give some more wiggle room in people’s budgets and help them reach affordability,” Bachaud said.
In addition to higher upfront costs, home buyers should also weigh other factors before buying mortgage points.
Set a timeline for living in your new home
“For most instances, it is definitely a considerable cost savings to be able to buy down on points,” said Kamila Elliott, a certified financial planner and co-founder and CEO of Collective Wealth Partners, a boutique advisory firm in Atlanta. Elliott is also a member of the CNBC Financial Advisor Council.
However, if you buy points and then refinance, that will not allow enough time for your upfront payment to appreciate, Elliott said.
Another important consideration is your timeline for how long you plan to live in the home.
With rates and home prices high, that means closing costs are also elevated, Elliott said.
Consequently, if you move before three to five years, you may take a bigger financial hit, she said.
“There could be a huge loss if you can’t stay in that property long enough to have those expenses amortized out over the time that you’re there,” Elliott said.
Consider other alternatives
If you have extra money when buying a home, you may instead choose to increase the size of your down payment.
This can be advantageous because it creates more equity in the home, Bachaud noted. It may also lower your monthly payments.
If that extra money is enough to bring your down payment to 20% of the home purchase price, that would eliminate the need for private mortgage insurance, which adds to monthly costs for mortgage borrowers who put down less than those sums.
However, you may see more of an effect on your monthly expenses by buying points rather than increasing your down payment, Elliott said.
It costs less for a seller to buy down somebody’s mortgage than it does for them to take a price reduction.
Stephanie Grubbs
licensed real estate agent at Douglas Elliman Real Estate
A point may cost $3,000 to $4,000, for example. But putting those sums toward a down payment likely will not make much of a difference on your monthly costs, Elliott said.
If you want to make sure your mortgage payment doesn’t exceed one-third of your take home income, then paying down on points could be the better option, she said.
In some situations, a seller may offer to buy down the rate, a concession to help offset costs for buyers. Grubbs said she has discussed employing this strategy with clients in her real estate practice.
“It costs less for a seller to buy down somebody’s mortgage than it does for them to take a price reduction,” Grubbs said.
Homebuyers may want to consider pursuing a 2-1 buydown, a mortgage that provides a low interest rate for the first year, a slightly higher rate in the second year and a full rate for the following years.
A 2-1 buydown may also sometimes be seller financed, according to Bachaud.
Talking to a loan officer can help you decide the best decision for your situation, Bachaud said.
Factor in the unknowns
How well any homebuying strategy fares in the long run depends on one big unknown: how the Federal Reserve will handle interest rates going forward.
The latest projections from the central bank call for two more rate hikes this year.
While today’s rates feel high, Elliott said she often reminds people that homebuyers in the 1980s would have loved to have had access to 6% mortgage rates.
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