New Year Same Old Problems?

 

Not necessarily when it comes to the mortgage rate market.  2022 started ominously as rates begin to slowly rise at the tail end of 2021.  In the first quarter of 2022, it was like gasoline added to the bonfire.  Rates shot up at one of their fastest clips in history.  By late spring / early summer of 2022 rates were approaching the 7% range and showed no signs of slowing down.

As we approached the fall of 2022 rates settled a bit in the mid-6 range.  In the second half of 2022, the mortgage and home purchase market slowed to a halt.  On the purchase side, interested buyers were still plagued by a serious lack of inventory and sellers who had not come to terms with the fact that home prices were no longer rising.  Potential buyers were still on the sidelines due to fears of rates continuing to rise.

On the refinance front, the numbers year-over-year were down significantly.  Many homeowners had previously locked in historic or near historic low rates.  These clients were in no mood to give up their fantastically low mortgage rates.

What Has Recently Changed?

There have been a few changes over the last quarter or so, that are making now a more attractive time to refinance.  First, property values so far have held up.  In the height of the real estate market in late 2020 through the end of 2021 property values seemed to increase every month.  During that time, a listing price was just a starting point.  Home after home sold above list price.  Often these homes are sold without a contingency for an appraisal or home inspection.

Some homes sold for 10% or 20% above the asking price.  In 2022 the market reversed.  Slowly at first and then suddenly.  As the home purchase market changed, listed homes received fewer offers.  Bidding wars for homes slowed and then disappeared.

If A Home Does Sell Above the Ask Price Does That Constitute a Decline In Home Values?

This question presents somewhat of a quandary for economists.  If a property that a month ago would have sold for 20% above ask now only sells for ask – is that a price decline?  Let’s look at an example.

A home listed on the market at the tail end of the real estate rush for $450,000.  The home listed just in time to still have a nice bidding war.  Some potential buyers at this time had already sold their prior homes well above .market and were now flush with cash.  In addition, these potential buyers were tuned into the market, followed inflation trends, and realized that mortgage rates were going to jump.

Although there were fewer offers on this particular property than there would have been 3 months priors, the few potential buyers did not want to miss out on the property.  The potential buyers bid the home up 10% above the ask.  The home sold for $495,000.

Did This Seller Miss The Boat?

A neighbor of the seller above listed their home three weeks later.  Their listing was before the sale of the above property at $495,.000.  At this point the market had turned.  There was still interested seller in the market, but the days of bidding wars were gone.  Sellers could no longer make a quick sale with no contingencies.

That being said, there were still interested buyers in the market.  Many of these potential buyers had been through the wringer the for the past year.  Over the prior year, these buyers may have placed offers on multiple homes.  These offers were always above asked, yet not accepted because there was always a higher offer.

The buyers in this market were still nervous about presenting a low offer.  Some of these buyers were already at the top end of their monthly budget and feared another big jump in mortgage interest rates.  In the end home, in this example sold at ask.

The home sold exactly at the ask, but not as high as the similar home that sold just prior at an inflated price.  Does this constitute a decline in home values?

Will Home Values Continue To Hold Up?

It is always a loaded question as to where home prices will go over the next 12-24 months.  We have seen enough volatility in the markets over the past year to know that there could always be an unexpected move in either direction.  Most indications are that the largest metro areas will see a price decline from here.  A price decline in the range of 5%-10% is not uncommon in some areas during a recession.

The good news is that given the huge run-up in property values from 2019 through 2021, even with a 10% drop from here most values will still be above where they were in late 2019 or early 2020.  Clients who have owned homes from 2014 on have all seen a significant buildup in equity over the last few years.

What Can Be Done With This Equity?

From the start of the Covid lockdown, through late 2021 we saw a trend of household consumer debt decreasing.  There were numerous reasons this decrease occurred.  People were in lockdown and not going out or traveling as they had done in the past.  In addition, Covid relief money was flying around.  Surprisingly, a fair amount of that Covid money went to debt repayment.  There have been rare times in US history when personal savings increase and personal debt went down.

The debt paydown phase started to change in late 2021 as inflation took hold.  Housing costs played a role in this reversal.  Although mortgage and credit card rates were still relatively low housing costs were rising at a record pace.

As we previously discussed, home prices were increasing month over month.  In addition to home price increases, rents increased at a pace never previously seen.  As people were forced to spend more of their monthly take home on housing costs, personal savings decreased.  More and more everyday purchases were moved to credit cards.

As the months went by, fewer and fewer credit card accounts were paid off monthly.  Since early 2022, we have seen huge monthly increases in overall outstanding consumer debt.

Equity Is A Tool Use It Wisely

Over the past 2-5 years, homeowners have built up a great deal of home equity.  At the same time, many of those same people have seen their debt increase.  Along with the increase in personal debt, credit card rates have skyrocketed.  It is not uncommon to see credit card rates in the 15%-17% range even for clients with top-tier credit.

If you are a homeowner with equity and are in a situation where your personal debt has increased recently, now is the time for a cashout refinance for debt consolidation.  Although, you are most likely in a situation where your current mortgage rate will increase when paying off much higher rate credit card debt a cash-out refiancne can help you save hundreds of dollars per month and put you in a much better financial situation.