New Jersey Real Estate Report

From the Philly Inquirer:

How the ‘lock-in effect’ is helping shape today’s housing market

Why? the supply of homes, as measured by homes for sale, is way down. It looks like we will end 2023 with inventory shrinking between 10% and 15% over the year.

And that raises the question, why are people not putting their homes on the market when prices have risen so much over the past few years? It’s largely due to the surge in prices and mortgage rates, but not for the normal reasons.

Over the past 10 years, home prices have basically doubled. During that time, interest rates were at historic lows. If you bought a home or refinanced, your mortgage was likely 4.5% or less. Unfortunately, those low-rate mortgages have created a major quandary for homeowners.

If the homeowners sell their house, they can realize the price gains and put the funds toward a new home. But then they have to give up their low mortgage rate and take out a new loan at a significantly higher rate. Going from a 4% mortgage to an 8% one, for a different home whose price has also doubled, creates more financial strain than many people would likely want.

The unwillingness to trade in a low-rate mortgage for a high-rate one, a threat that economists warned about years ago, has been nicknamed the “lock-in effect.” Goldman-Sachs estimated that “nearly all mortgage borrowers have interest rates below current market rates, and that almost 90% have rates more than 2pp below and over 60% have rates more than 4pp below.”

In other words, if you own a home and are thinking of selling and moving to another house, you are almost certainly facing mortgage rates a lot higher than you currently have. That is making most homeowners think twice about entering the market. The soaring mortgage rates have created a financial barrier to selling and moving. Think of it as “Golden Handcuffs.”

From CNBC:

Adjustable-rate mortgage demand hits highest level in nearly a year as interest rates continue to climb

Mortgage demand has essentially stalled at the slowest pace since 1995 as mortgage interest rates continue to rise.

Total application volume dropped 1% last week compared to the previous week, according to the Mortgage Bankers Association’s seasonally adjusted index.

One type of mortgage, however, is seeing new life. The adjustable-rate mortgage share of total demand hit 9.5%, the highest level in nearly a year. ARMs offer slightly lower rates.

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($726,200 or less) increased to 7.90% from 7.70%, with points increasing to 0.77 from 0.71 — including the origination fee — for loans with a 20% down payment.

The average contract interest rate for 5/1 ARMs increased to 6.99% from 6.52%.

“Ten-year Treasury yields climbed higher last week, as global investors remained concerned about the prospect for higher-for-longer rates and burgeoning fiscal deficits,” said Joel Kan, an MBA economist, in a release. “Rates have now risen seven consecutive weeks at a cumulative amount of 69 basis points.”

Applications to refinance a home loan increased 2% from the previous week and were 8% lower than the same week one year ago. That annual comparison is shrinking because refinancing crashed just over a year ago, when mortgage rates first started to rise sharply.

Refinances now make up less than a third of total application activity. Just two years ago, when rates were hovering around record lows, they made up two thirds of mortgage demand.

From CNBC:

The housing market was already painful, ugly and anxious. Now the 8% mortgage rate is back

Today’s housing market is a toxic mix of high mortgage rates, high prices, tight supply and strangely strong pent-up demand — and it’s scaring off buyers and sellers alike.

Prices were already high, driven by supercharged demand during the height of the Covid-19 pandemic. Now the popular 30-year fixed mortgage rate is at 8%, the highest in decades, making things even tougher. Mortgage demand is at its lowest point in nearly 30 years.

“I think it’s painful. I think it’s ugly,” Matthew Graham, chief operating officer at Mortgage News Daily, said on CNBC’s “The Exchange” on Thursday.
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Would-be sellers, meanwhile, are trapped. They have little desire to trade the 3% rate they currently have for an 8% mortgage rate on a new purchase.

“I don’t think anybody in my community of mortgage originators would disagree that in many ways, this is worse than the great financial crisis in terms of volume and activity,” MND’s Graham said.

He’s also unsure when the market will see a decline in rates. “But we do hear a chorus of Fed speakers, especially last week, in a very notable way, saying that they are restrictive and that they can wait and see what happens with the policy filtering through to the economy,” he said.
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Prices are a different story.

“Prices look to be flat from this point onwards at an 8% rate, despite the housing shortage,” added Lawrence Yun, chief economist for the NAR.

Yun noted that metropolitan markets with faster job growth and relatively affordable prices, however, will see an upswing in sales. He points to Florida markets such as Tampa, Jacksonville and Orlando, as well as Houston, Texas, and Memphis, Tennessee.

Buyers today will likely get the best deals from homebuilders, especially the large production builders such as Lennar and D.R. Horton. The builders are helping with affordability by buying down interest rates for their customers. This is something they have not typically done in the past — at least not at this scale.
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For those still wanting to upgrade to a bigger home or downsize to a smaller one, they are caught in a conundrum.

Prices are still rising due to the supply and demand imbalance, but sellers are being more flexible. So a buyer could purchase now at the higher rates and hope to get a break on the price, or they can wait until rates drop.

But when they do, there is likely going to be a flood of demand, resulting in bidding wars.

From CNBC:

September home sales drop to the lowest level since the foreclosure crisis

Sales of previously owned homes dropped 2% in September from August to a seasonally adjusted, annualized rate of 3.96 million units, according to the National Association of Realtors. Sales were 15.4% lower compared with September 2022.

This is the slowest sales pace since October 2010, during the Great Recession, when the market was in the midst of a foreclosure crisis. As a comparison, just two years ago, when mortgage rates hovered around 3%, home sales were running at a 6.6 million pace. The average rate on the 30-year fixed today is right around 8%, according to Mortgage News Daily.

“As has been the case throughout this year, limited inventory and low housing affordability continue to hamper home sales,” said Lawrence Yun, NAR’s chief economist. “The Federal Reserve simply cannot keep raising interest rates in light of softening inflation and weakening job gains.”

There were 1.13 million homes for sale at the end of September, down more than 8% from a year ago. Inventory is now at a 3.4-month supply, which is slightly better than last year, but only because sales have dropped so much. Supply is based on the current sales pace.

Adding to higher mortgage rates, the median price of a home sold in September was $394,300, up 2.8% year over year. Roughly 26% of home sold above list price, due to the lack of supply which is resulting in bidding wars.

First-time buyers made up just 27% of sales. Historically, they make up about 40%.