The State Of The Housing Market

Originally Written: March 2022

Lastest Update: September 2022

If you’re trying to buy a home or you want to refinance your current mortgage in the near future, it’s important to be aware of the state of the housing market. It’s just as key to understand local market dynamics if you’re looking to sell. In this report, we’ll be taking a look at everything from rates to inventory and home equity.

The answer to this question depends on whether you’re a buyer or a seller. 

If you’re a seller, things are still pretty great. You can command a fairly high asking price and your home could generate multiple offers above asking – plus, the contract will contain few (if any) contingencies.  In short, it’s still a seller’s market in most areas. However, there are signs of a cool down.

Earlier this year, we saw people engaged in bidding wars, waving contingencies and – if at all possible – making all-cash offers above asking price. Now the pendulum is starting to swing the other way. 

Hope may be on the horizon for buyers, however. As interest rates rise, the rate of house price appreciation has lessened, competition has started to wane, and buyers have begun to regain some of their bargaining power.          

Homeowners may feel too uncertain about the future to sell despite sky-high prices, which is one reason why we continue to experience low housing inventory. But in general, they have plenty of home equity right now to make capital improvements to their home. By getting a cash-out refinance or home equity loan, homeowners can make their current home feel brand-new without selling and buying a new place. 

Let’s take a minute to run through how this report was put together.

The numbers listed in this article are national in scope. Data was gathered from various sources including the Federal Reserve, Black Knight – a software provider for mortgage servicers, the U.S. Census Bureau and National Association of REALTORS^®.

Although this post isn’t meant to touch on local markets, the axiom that real estate is about location, location, location is as true today as it ever was. Given this, we’ll go over some resources to provide a much more accurate picture of market conditions in your own area throughout this post.

There are a number of personal factors that impact your interest rate. Two of the biggest ones are your down payment – or the amount of equity left after your refinance – and your credit score.

However, interest rates are also impacted by market factors. It’s for this reason that timing can be key when buying or refinancing. Let’s look at a few of these market forces. 

The Influence Of The Federal Reserve

The federal funds rate is the target interest rate set by the Federal Reserve, or the “Fed,” at which commercial banks borrow and lend their extra reserves to one other overnight. The important thing to know here is that if it’s cheaper for banks to borrow money, it’s also cheaper for consumers.

Similarly, if giving funds becomes more expensive, it becomes that much more costly for a client because the increases tend to be passed through.

Stimulus

Over the course of the pandemic, the Federal Reserve chose to keep rates at rock-bottom levels between 0% – 0.25% to stimulate the economy by making interest rates as low as possible, which made it easier for consumers to borrow and spend. That’s because the Fed feared that the pandemic might cause a recession, and they wanted to stimulate the economy.

Inflation has been a major issue recently. There are several factors that go into this including various macroeconomic events we’ll get into in a minute, but the one the Fed has control over is the federal funds rate.

If you make it cheaper for people to borrow money, more money ends up circulating. This is good because it allows people to spend, but on the other hand, it means the money already out there is worth less because the supply is plentiful. This traditionally leads to higher rates of inflation.

Austerity

By raising short-term interest rates, the Fed makes it more expensive for banks to borrow money. When they do this, the bank is predisposed to more tightly hold onto the money it already has. When this happens, they start paying people who have money in the bank higher interest rates so the interest you receive goes up.

The downside of this is that interest rates are higher if you’re looking to borrow money, including for mortgages.

Where Is The Fed Headed Through The End Of 2022?

On September 21, the Fed once again increased interest rates by 0.75%, or 75 basis points. Moreover, the median expectation shows it’s possible that the federal funds rate will rise to 4.4% or higher by the end of the year.

Although mortgage rates and other longer-term rates don’t exactly match up one to one with shorter-term rates, they do follow the same general direction. So as the Fed raises rates, mortgage rates are sure to follow.

Mortgage-Backed Securities

Mortgage rates are based on mortgage-backed securities (MBS). MBS are investment vehicles made up of mortgages. You can think of an MBS as being made up of 1,000 or more loans that have similar attributes. For example, you might choose to invest in securities derived from conventional loans for primary homes with qualifying credit scores of 720 or higher, if you're looking for a safe investment.

Are MBS A Good Investment?

Mortgage-backed securities are sold in the bond market. Bonds are considered safer investments because they have a guaranteed rate of return. Moreover, mortgages are considered really safe because they have either a government guarantee or an implied government guarantee in most cases.

So why not invest in bonds and mortgages at all times? While they have a guaranteed rate of return, it also doesn’t change. They aren’t great investments in times of higher inflation.

Additionally, if you think the economy is doing well, you’re more likely to invest in stocks. These offer a better rate of return, but also a higher risk of losses because you’re betting on company performance in addition to market sentiment that can be fickle.

Now that we have higher inflation, many investors are looking to other places than the bond market. This means that in order to attract investors, the bond yield has to be higher, leading to higher mortgage rates.

What’s The Fed’s Role In MBS?

The Fed is also involved here as well. Because housing has such a big role in the economy – it produces 15% – 18% of U.S. gross domestic product – the Fed was buying huge amounts of MBS in order to help keep rates down during the economic recovery.

By far the biggest holder of MBS, as of this writing, the Federal Reserve had $2,714,887,000,000 (yes, that’s trillion). Additionally, they were buying more every month. They’ve stopped doing that.

However, one of the things the Fed has begun is the process of getting these MBS off their balance sheet. This allows allow the Fed to have the resources to follow a similar strategy of purchasing MBS in the event of another economic crisis.

The Fed started selling MBS back into the market at a rate of $17.5 billion per month through August. In September, that amount has increased as scheduled to $35 billion per month.

When the Fed begins selling off, that major investor is gone. In order to make up the volume, rates will have to go up to raise yields and attract other investors.

Macroeconomic Events

As the economy has become fully globalized, far-flung events like military conflicts halfway across the world affect gas prices here in the U.S., as one example.

Geopolitical Events

Most recently, Russia invaded Ukraine. This has attracted international condemnation. There is a movement afoot to make sure that Russia suffers the consequences of its actions. Because of this, the U.S. has stopped buying Russian oil. As a result, not only has the price of gas shot up, but U.S. oil has become a very attractive investment. Some people who would normally invest in bonds have taken their money elsewhere. As a result, mortgage rates go up.

Supply Chain Issues

The other thing that’s having a big impact on inflation right now is that the supply chain is still getting back to normal post COVID-19 lockdowns. The problem is the entire supply chain is connected, so a lockdown in China affects the prices of goods we buy here in the U.S.

As a prime example, let’s take a look at the auto industry. 

Case In Point: The Auto Industry

When lockdowns started happening, auto manufacturers shut down the lines because very few people were buying cars.

When people stopped ordering cars, key suppliers of computer chips that went in cars put their energy and investment elsewhere. Once the orders restarted, those same suppliers had challenges switching the lines back. To this day, it’s hard to find cars on the lot and what is available is being sold at a higher price.

Inflationary Pressures

Cars are a very visible example, but there are stories like that across the economy and prices have gone up on a widespread basis. In the last 12 months, prices have increased 8.3% in one index from the Bureau of Labor Statistics.

This matters because bonds, including mortgage bonds, aren’t considered especially attractive in times of high inflation. Investors like to be sure that their return is at least going to outpace price increases. As a result, yields on bonds have to increase. This pushes up mortgage rates.

As rates go up, mortgage payments obviously go up, posing a challenge to affordability. One of the ways around that for buyers is to take a longer term. This could enable you to have a lower payment even at a slightly higher rate.

Existing Homes

The bigger challenge for buyers right now, and the biggest opportunity for sellers, is the lack of inventory, particularly in the market for existing homes.

According to the latest data from the National Association of REALTORS^®, inventory of existing homes was at 1.28 million units. At the current pace of sales, every pre-owned home on the market would sell in 3.2 months. Although not the record pace of a few months ago, inventory is still tight.

The good news is it seems like sellers are cluing into the fact that they can’t expect such high prices amid rising mortgage rates. The median existing home price in August was down to $389,500, which has fallen from a record of $413,800 in June. It remains to be seen how much of this is discounting at the end of the summer selling season, but it’s encouraging for buyers.

New Homes

The place where there’s not really an inventory problem is in the new home sales market. In the latest release (August 23, 2022) from the Census Bureau, there was 10.9 months’ worth of supply. A market is considered in balance between buyers and sellers when supply is at 6 months. So things actually favor buyers a bit, but people often choose to look at existing inventory first because it’s perceived to be cheaper.

Homes that were just built had a median sales price of $439,400. Earlier in the year at one point, the median price for a new home was actually lower than that of an existing home. A more normal trend has returned. The average price was higher at $546,800.

What’s going to be interesting going forward is how fast prices experience a bit of a correction. As rates go up and affordability is further challenged, prices won’t be able to rise as fast while still attracting buyers. 

One thing that’s in short supply right now is starter homes. Builders have moved to higher price points in search of profitability. Expect that will be a challenge unless and until more affordable inventory comes to market. It’s not that they don’t exist, but you may need to have more patience in your search.

Local Market Trends

As a seller, it’s going to be incredibly important to keep an eye on conditions in your area. While some markets continue to soar, others have come back down to Earth. You can get an estimate of how much your home is worth from our friends at Rocket Homes^SM,.¹

Rocket Homes displays a variety of trend data on the same page where you can see how much your home is worth. If the median sale price dips or if homes are staying on the market longer, it could be that the market in your area has tilted toward buyers. You can also see trends in the past year.

On the flipside, buyers can also take advantage of these trend reports if they have an idea of the city or ZIP code in which they’d like to look for a home. On either side of the transaction, information is power.

Another thing that can really help is having a trusted professional in your corner advising you. Whether you’re looking to buy a home or sell your place, a Rocket Homes Verified Partner Agent can align on your goals, and help advise you all the way through a successful transaction.

Not every transaction is about buying or selling a home. Sometimes you want to use your home to accomplish a goal. Your home is a massive financial resource. Every time you make a payment, or your home gains value based on favorable market movements, you get a little bit more equity in your home.

What Is Home Equity?

Equity is the difference between your home’s value and your mortgage balance. For example, if you have an outstanding mortgage balance of $200,000 on a $300,000 home, you have $100,000 worth of equity. Looked at another way, you have 33% equity in your home ($100,000 ∕ $300,000 = 0.33).

How Is Home Equity Calculated?

Lenders look at your equity in reverse, calculating something called loan-to-value ratio (LTV). This is your mortgage balance divided by your current home value. Using the example above, your LTV would be 67% ($200,000 ∕ $300,000 = 0.67).

This percentage can be key. In general, if you have more than 20% equity, you may be able to do a cash-out refinance in order to accomplish a home improvement like a bathroom renovation or a financial goal such as debt consolidation.

According to Black Knight, Americans were sitting on $11.5 trillion worth of tappable equity as of August, defined by them as equity in excess of 20%. That’s an incredible source of financial flexibility.

They do note that home values have declined in some areas on the western side of the U.S. These were previously some of the hottest markets. While homeowners may not be happy, it could be a welcome relief to prospective buyers in those areas.

It’s also important to note that even as rates rise, interest rates will be going up across the board. The thing about mortgages is that in any interest rate environment, they’re often the most cost-effective borrowing option because it’s typically the lowest interest rate you can get.

With rates going up and home prices not always reacting in step with those movements, you might feel like you’re paying more for a mortgage than you want to at this point. The thing to know is that mortgage rates are constantly up and down, so if you see a rate you like, go ahead and lock it in. Rather than getting caught up in the day-to-day gyrations of the market, focus on your budget and whether it's the right time for you.

Mortgage rates are headed up. As rates rise and homes sit on the market longer, the seemingly inescapable pressure cooker on prices will have some of the steam let out of it. 

But it’s not all bad news. If you’re looking to purchase, higher mortgage interest rates will cause some home buyers to leave the market, meaning there will be less competition for the low inventory available. 

Are you ready to buy a home or refinance your current one? Start your application online and lock in before interest rates rise again.

¹ Rocket Homes^SM is a registered trademark licensed to Rocket Homes Real Estate LLC. The Rocket Homes^SM Logo is a service mark licensed to Rocket Homes Real Estate LLC. Rocket Homes Real Estate LLC fully supports the principles of the Fair Housing Act. For Rocket Homes Real Estate LLC license numbers, visit  RocketHomes.com/license-numbers. California DRE #01804478. Hawaii License # RB-23371. TREC: Information about brokerage services, Consumer protection notice.

²  Rocket Mortgage, LLC; NMLS #3030; www.NMLSConsumerAccess.org. Equal Housing Lender. Licensed in 50 states. AL License No. MC 20979, Control No. 100152352. AR, TX: 1050 Woodward Ave., Detroit, MI 48226-1906, (888) 474-0404; AZ: 1 N. Central Ave., Ste. 2000, Phoenix, AZ 85004, Mortgage Banker License #BK-0902939; CA: Licensed by the Department of Financial Protection and Innovation under the California Residential Mortgage Lending Act; CO: Regulated by the Division of Real Estate; GA: Residential Mortgage Licensee #11704; IL: Residential Mortgage Licensee #4127 – Dept. of Financial and Professional Regulation; KS: Licensed Mortgage Company MC.0025309; MA: Mortgage Lender License #ML 3030; ME: Supervised Lender License; MN: Not an offer for a rate lock agreement; MS: Licensed by the MS Dept. of Banking and Consumer Finance; NH: Licensed by the NH Banking Dept., #6743MB; NV: License #626; NJ: New Jersey – Rocket Mortgage, LLC, 1050 Woodward Ave., Detroit, MI 48226, (888) 474-0404, Licensed by the N.J. Department of Banking and Insurance.; NY: Rocket Mortgage, LLC, 1050 Woodward Ave., Detroit, MI 48226 Licensed Mortgage Banker-NYS Department of Financial Services; OH: MB 850076; OR: License #ML-1387; PA: Licensed by the Dept. of Banking –​ License #21430; RI: Licensed Lender; WA: Consumer Loan Company License CL-3030. ​Conditions may apply.