From the lows of 3.22% in January to a high of 6.7% last week, rising mortgage rates have substantially impacted the housing market in so many ways.
The High-Rate Environment: Mortgage rates have more than doubled after ringing in 2022.
Back in 1989, gas prices averaged 99¢. It reached $1.59 in 2000, jumped to $3.11 in 2010, and was nearly unchanged at $3.04 a decade later in 2020. However, in 2021, the price for a gallon of gas jumped from $3.26 in January to $4.60 by year’s end, a 41% increase. It was the largest rise since 2009. In 2022, gas prices soared even higher and sat at $6.40 to start October, up another 43%. Prices had nearly doubled since January 2021. From driving less, to carpooling, to combining errands, to eating out less, at these levels, consumers have adjusted their behaviors. It has been similar for housing, and an even larger adjustment in consumer behavior, as not only have home values surged higher, so have mortgage rates. The combination of the two has rippled throughout the housing market. In Orange County, according to the Federal Housing Finance Agency Home Price Index, home values rose annually by 4.3% in 2020, the first year of COVID, up 15.9% in 2021, and surged to 22% higher through the 2nd quarter ofThat’s when the median value of a detached home stretched to nearly $1.3 million, a mind-blowing 51% higher than January 2020’s $855,000 median. Home values had reached unbelievable heights.
In addition to values rocketing higher this year, so have mortgage rates. Upon ringing in the New Year, according to Freddie Mac’sPrimary Mortgage Market Survey®, rates were at 3.22%.
They surpassed 4% in March, 5% in April, 6% in September, and reached 6.7% last Thursday, more than double the start to 2022. The combination of higher rates and higher home values has completely flipped housing on its head and consumers have changed their approach to housing.
The ultra-low-rate environment and lack of available homes on the market, which reached record low levels in 2020 and 2021, allowed home values to escalate out of control. Mortgage rates remained at record lows from April 2020, after the start of COVID, through the first week of this year, 21-months straight where they ranged between 2.65% to 3.5%. Despite increasing values, payments for the median priced detached home in Orange County increased from $3,509 in January 2020 to $3,561 in January 2021, a rise of only $52 per month.
Unfortunately, rates remained low, and the inventory dropped to unprecedented levels. A peak of only 2,537 available homes was reached in July 2021, far below the 3-year average peak prior to COVID (2017 to 2019) of 6,959, a mind-blowing 64% less. The inventory had reached catastrophically low levels, which is why home values catapulted to astronomical heights. As a result, payments had reached $4,797 per month in January of this year. As rates shot higher in 2022, so did payments. March’s 4.7% rate and a $1.3 million detached median meant payments had grown to $5,724 per month. Payments stretched to $6,480 in June. As of the end of September, with rates at 6.7%, the payment had jumped to $6,969 per month. For perspective, that is an extra $3,460 per month, or $41,520 more per year, for the median priced detached home in September compared to the median priced detached home in January 2020.
ORANGE COUNTY ACTIVE LISTING INVENTORY: YEAR-OVER-YEAR
There are many consequences to sky-high rates. Demand has dropped to ultra-low levels. It is 37% lower than last year and 29% lower than the 3-year average prior to COVID. With fewer buyers in the marketplace, foot traffic is way down, OPEN HOUSE attendance is down considerably, multiple offers are the exception and not the rule, sales prices are normally below the asking price, and market times have increased substantially. Buyers are no longer waiving appraisals, waiving inspections, providing free rent backs to sellers, or paying substantially above asking prices. The fewer buyers that remain are taking their time and very carefully approaching the market. In the end, they are absorbing a much higher monthly payment, even with buying down the mortgage rate or going the adjustable-rate route.
Typically, in a year where mortgage rates spike higher, the inventory climbs much higher as well. As homeowners come on the market monthly, they are greeted with muted demand. There are fewer success stories, so these sellers accumulate on the market and the inventory grows. With a rising inventory and dropping demand, market times grow, and it takes much longer to sell. That was the story in 2013 when rates rose from 3.34% at the start of the year to 4.57% in September. The inventory grew from 3,163 in January to its peak of 6,350 homes in October. A normal peak occurs between July and August, but in years where rates substantially rise, the peak is delayed into the Autumn Market as there are more sellers who languish on the market.
This year as rates exploded higher, the inventory grew from 954 homes at the start of the year to a peak of 4,069 at the start of August. It stopped rising early and has dropped to 3,646 today. As a result of sky-high rates homeowners are opting to not sell. They do not want to trade their incredibly low monthly mortgage payment where more than two-thirds of homeowners with a mortgage are enjoying a rate at or below 4%. Many homeowners are hunkering down and opting to stay even if they have an itch to make a move. In fact, there were 784 missing FOR-SALE signs in July, 21% fewer, 1,051 missing signs in August, 30% fewer, and 728 missing in September, 728 fewer. The lack of new sellers is preventing the inventory from growing despite demand falling an additional 13% in the past four weeks.
The Expected Market Time, the amount of time between coming on the market to opening escrow, has grown from 19 days in March to 68 days today. Normally, anything between 60 and 90 days is considered a Slight Seller’s Market where sellers get to call more of the shots, there are not as many multiple offers, and home values are only rising slightly. Between 90 and 120 days is a Balanced Market that does not favor buyers or sellers during negotiations and values do not change much. Between 120 and 150 is a Slight Buyer’s Market where buyers get to call more of the shots and home values drop only a bit. Above 150 days is a Deep Buyer’s Market where buyers call the shots and values are dropping.
Yet, this supply and demand model is broken due to today’s unaffordability levels. The further rates surged above 5%, after lingering below 3.5% for so long, the more the pool of prospective buyers evaporated. The remaining buyers are not interested in paying the frothy prices of earlier in the year. They do not want to continue to stretch prices to record territories either. They want to pay the Fair Market Value of a home based upon its condition, location, age, upgrades, and amenities, ignoring buyers who paid tens of thousands of dollars more than the asking price, and even hundreds of thousands of dollars more, during the first half of 2022. According to the Case-Shiller Home Price Index, and other indexes that more accurately determine values than just looking at monthly median sales price, home values started retreating in May.
As long the sky-high mortgage rate environment continues, expect demand to remain muted, values to slowly drop, and fewer homeowners willing to participate in today’s housing market as they continue to hunker down.