Monday, September 26, 2022
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Mortgage Rates Dip, but Homebuilders Warn of ‘Housing Recession’

Mortgage rates fell slightly this week, averaging 5.13% for the fixed 30-year term, according to Freddie Mac. Though interest rates have cooled slightly, borrowing costs for both fixed-rate and adjustable-rate mortgages remain much higher than they were the same time last year. Here are the current mortgage interest rates, as of Aug. 18:

  • 30-year fixed: 5.13% with 0.8 point (down from 5.22% a week ago, up from 2.86% a year ago).
  • 15-year fixed: 4.55% with 0.7 point (down from 4.59% a week ago, up from 2.16% a year ago).
  • 5/1-year adjustable: 4.39% with 0.3 point (down from 4.43% a week ago, up from 2.43% a year ago).

Erika Giovanetti

“Inflation appears to be beyond its peak, which has stopped the rapid increase in mortgage rates that the housing market was experiencing earlier this year. The market continues to absorb the cumulative impact of the large price and rate increases that led to a plunge in affordability. As a result, over the rest of the year purchase demand likely will continue to drag, supply will modestly increase, and home price growth will decelerate.”

– Sam Khater, Freddie Mac’s chief economist, in an Aug. 18 statement

While Khater’s statement seems to indicate hopeful signs of a normalizing housing market for buyers, these positive takeaways aren’t shared by homebuilders.

Housing market sentiment continues to tumble among members of the National Association of Home Builders, a leading trade group of real estate developers who play a key role in supplying the nation’s housing inventory. The NAHB’s confidence index has dipped below its break-even measure of 50, falling to its lowest point since 2014, not counting two months in 2020 at the start of the COVID-19 pandemic.

Erika Giovanetti

“Tighter monetary policy from the Federal Reserve and persistently elevated construction costs have brought on a housing recession,” Robert Dietz, chief economist at NAHB, says in a news release. “The total volume of single-family starts will post a decline in 2022, the first such decrease since 2011.”

It makes sense why housing market stabilization would be better news for buyers than for builders. Over the past few years of a competitive seller’s market, homebuilders have been able to capitalize on low supply and strong demand due to rock-bottom mortgage interest rates.

But now that homebuyers have a growing amount of leverage – no longer waiving inspection contingencies or bidding well over asking price – homebuilders are having to drop prices to sell properties. The median sales price of new construction homes fell from $444,500 in May to $402,400 in June, according to the Census Bureau.

Indicator of the Week: The End of the Starter Home

Seeing this dismal attitude from homebuilders reminded me of a passage from the memoir “Persist” by Sen. Elizabeth Warren, D-Mass., on housing construction and profitability.

“So why haven’t Americans built enough new housing to meet the demand? The first reason is that most private developers are no longer building the 1,150-square-foot house I grew up in. Instead, developers have migrated to 4,000-square-foot starter mansions and luxury condos with access to gyms and infinity pools. There’s an obvious reason for this change: Those giant houses and big-ticket condos are more profitable to build.”

Although Warren’s statement is slightly guilty of the ever-present political hyperbole, it’s not too far off base. Freddie Mac defines a “starter home” as one that’s 1,400 square feet or smaller. However, the average square footage of new construction single-family homes built today is around 2,500 square feet, Census Bureau data shows.

Additional research confirms a decadeslong trend of building larger (and more expensive) houses. Freddie Mac reports that the supply of entry-level homes has significantly declined since the late 1970s, when about 418,000 starter homes were built per year. By 2020, that number was just 65,000.

Perhaps the blame doesn’t fall on homebuyers who are struggling with high home prices and rising mortgage rates. Rather than turning to a large new-construction build, some buyers would rather have a smaller, pre-owned home that falls within their purchase budget. In fact, the lowest-priced homes are attracting the most competition in today’s market, according to Zillow.

The undeniable demand for starter houses would explain the strength in existing-home sales mentioned in last week’s column. But builders seem hesitant to shift their focus to affordable housing.

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