Tag Archives: Housing Prices

Understanding The Interest Rate Headwind Facing Housing

There are a large number of public and private services that measure the change in home prices. The algorithms behind these services, while complex, are primarily based on recent sale prices for comparative homes and adjusted for factors like location, property characteristics and the particulars of the house. While these pricing services are considered to be well represented measures of house prices, there is another important factor that is frequently overlooked despite the large role in plays in house prices.

In August 2016, the 30-year fixed mortgage rate as reported by the Federal Reserve hit an all-time low of 3.44%. Since then it has risen to its current level of 4.50%. While a 1% increase may appear small, especially at this low level of rates, the rise has begun to adversely affect housing and mortgage activity. After rising 33% and 22% in 2015 and 2016 respectively, total mortgage originations were down -16% in 2017. Further increases in rates will likely begin to weigh on house prices and the broader economy. This article will help quantify the benefit that lower rates played in making houses more affordable over the past few decades. By doing this, we can appreciate how further increases in mortgage rates might adversely affect house prices.

Lower Rates

In 1981 mortgage rates peaked at 18.50%. Since that time they have declined steadily and now stands at a relatively paltry 4.50%. Over this 37-year period, individuals’ payments on mortgage loans also declined allowing buyers to get more for their money. Continually declining rates also allowed them to further reduce their payments through refinancing. Consider that in 1990 a $500,000 house, bought with a 10%, 30-year fixed rate mortgage, which was the going rate, would have required a monthly principal and interest payment of $4,388. Today a loan for the same amount at the 4.50% current rate is almost half the payment at $2,533.

The sensitivity of mortgage payments to changes in mortgage rates is about 9%, meaning that each 1% increase or decrease in the mortgage rate results in a payment increase or decrease of 9%. From a home buyer’s perspective, this means that each 1% change in rates makes the house more or less affordable by about 9%.

Given this understanding of the math and the prior history of rate declines, we can calculate how lower rates helped make housing more affordable. To do this, we start in the year 1990 with a $500,000 home price and adjust it annually based on changes in the popular Case-Shiller House Price Index. This calculation approximates the 28-year price appreciation of the house. Second, we further adjust it to the change in interest rates. To accomplish this, we calculated how much more or less home one could buy based on the change in interest rates. The difference between the two, as shown below, provides a value on how much lower interest rates benefited home buyers and sellers.

https://www.zerohedge.com/sites/default/files/inline-images/1-house-inflation.png?itok=naYdkoxQData Courtesy: S&P Core Logic Case-Shiller House Price Index

The graph shows that lower payments resulting from the decline in mortgage rates benefited buyers by approximately $325,000. Said differently, a homeowner can afford $325,000 more than would have otherwise been possible due to declining rates.

The Effect of Rising Rates

As stated, mortgage rates have been steadily declining for the past 37 years. There are some interest rate forecasters that believe the recent uptick in rates may be the first wave of a longer-term change in trend.  If this is, in fact, the case, quantifying how higher mortgage rates affect payments, supply, demand, and therefore the prices of houses is an important consideration for the direction of the broad economy.

The graph below shows the mortgage payment required for a $500,000 house based on a range of mortgage rates. The background shows the decline in mortgage rates (10.00% to 4.50%) from 1990 to today.

https://www.zerohedge.com/sites/default/files/inline-images/2-pay-per-mtge.png?itok=FaM3amlH

To put this into a different perspective, the following graph shows how much a buyer can afford to pay for a house assuming a fixed payment ($2,333) and varying mortgage rates. The payment is based on the current mortgage rate.

https://www.zerohedge.com/sites/default/files/inline-images/3-payments.png?itok=QlXlfTjL

As the graphs portray, home buyers will be forced to make higher mortgage payments or seek lower-priced houses if rates keep rising.

Summary

The Fed has raised interest rates six times since the end of 2015. Their forward guidance from recent Federal Open Market Committee (FOMC) meeting statements and minutes tells of their plans on continuing to do so throughout this year and next. Additionally, the Fed owns over one-quarter of all residential mortgage-backed securities (MBS) through QE purchases. Their stated plan is to reduce their ownership of those securities over the next several quarters. If the Fed continues on their expected path with regard to rates and balance sheet, it creates a significant market adjustment in terms of supply and demand dynamics and further implies that mortgage rates should rise.

The consequences of higher mortgage rates will not only affect buyers and sellers of housing but also make borrowing on the equity in homes more expensive. From a macro perspective, consider that housing contributes 15-18% to GDP, according to the National Association of Home Builders (NAHB). While we do not expect higher rates to devastate the housing market, we do think a period of price declines and economic weakness could accompany higher rates.

This analysis is clinical using simple math to illustrate the relationship, cause, and effects, between changes in interest rates and home prices. However, the housing market is anything but a simple asset class. It is among the most complex of systems within the broad economy. Rising rates not only impact affordability but also the general level of activity which feeds back into the economy. In addition to the effect that rates may have, also consider that the demographics for housing are challenged as retiring, empty-nest baby boomers seek to downsize. To whom will they sell and at what price?

If interest rates do indeed continue to rise, there is a lot more risk embedded in the housing market than currently seems apparent as these and other dynamics converge. The services providing pricing insight into the value of the housing market may do a fine job of assessing current value, but they lack the sophistication required to see around the next economic corner.

Source: ZeroHedge

US Home Prices Surge Most Since 2014

For the 29th month in a row, US home prices rose at a faster pace than incomes with November prices rising a better than expected 6.41% – the highest since July 2014.

The 20-City Composite rose 6.41% YoY in November (above the 6.30% expectations)

https://www.zerohedge.com/sites/default/files/inline-images/20180130_CS.jpg

The 20-City Composite price index is within 1% of its record highs from 2006…

https://www.zerohedge.com/sites/default/files/inline-images/20180130_CS1.jpg

“Top”? or “Breakout”?

Source: ZeroHedge

 

Latest S&P/Case-Shiller Data Points to Potential Woes

by Phil Hall

The latest data from the S&P/Case-Shiller Home Price Indices found housing prices slowing down during November 2014, leading to concern of a possibly weak housing market for this year.

The 10-City Composite gained 4.2 percent year-over-year in November, but that was down from 4.4 percent in October. The 20-City Composite gained 4.3 percent year-over-year, which was down from 4.5 percent in October. The S&P/Case-Shiller U.S. National Home Price Index, which covers all nine U.S. census divisions, recorded a 4.7 percent annual gain in November 2014, slightly above the 4.6 percent level recorded one month earlier.

However, there was good news from November’s numbers: Miami and San Francisco posted annual gains of 8.6 percent and 8.9 percent, respectively, while Tampa, Atlanta, Charlotte, and Portland also saw year-over-year housing price increases.

David Blitzer, managing director and chairman of the Index Committee at S&P Dow Jones Indices, acknowledged that the housing market could be stronger.

“With the spring home buying season, and spring training, still a month or two away, the housing recovery is barely on first base,” Blitzer said. “Prospects for a home run in 2015 aren’t good. Strong price gains are limited to California, Florida, the Pacific Northwest, Denver, and Dallas. Most of the rest of the country is lagging the national index gains. Moreover, these price patterns have been in place since last spring. Existing home sales were lower in 2014 than 2013, confirming these trends.

“Difficulties facing the housing recovery include continued low inventory levels and stiff mortgage qualification standards,” Blitzer added. “Distressed sales and investor purchases for buy-to-rent declined somewhat in the fourth quarter. The best hope for housing is the rest of the economy where the news is better.”

Housing Price Gains Slow For 9th Straight Month, Says S&P/Case-Shiller

https://i1.wp.com/www.fortunebuilders.com/wp-content/uploads/2014/11/detroit-housing-market-summary.jpgby Erin Carlyle

Growth in home sales prices continued to slow across the nation in September, marking nine straight months of deceleration, data from S&P/Case-Shiller showed Tuesday.

U.S. single-family home prices gained just 4.8% (on a seasonally-adjusted basis) over prices one year earlier, down from a 5.1% annual increase in August, the S&P/Case-Shiller National Home Price Index shows. The measure covers all nine Census divisions. Significantly, September also marked the first month that the National Index decreased (by 0.1%) on a month-over-month basis since November 2013.

“The overall trend in home price increases continues to slow down,” says David M. Blitzer, chairman of the Index Committee at S&P Dow Jones Indices. “The only region showing any sustained strength is the Southeast led by Florida; price gains are also evident in Atlanta and Charlotte.”

Price gains have been steadily slowing since December after a streak of double-digit annual price increases in late 2013 and early 2014. Eighteen of the 20 cities Case-Shiller tracks reported slower annual price gains in September than in August, with Charlotte and Dallas the only cities where annual price gains increased. Miami (10.3%) was the only city to report double-digit annual price gains.
CaseShiller

The chart above depicts the annual returns of the U.S. National, the 10-City Composite and the 20-City Composite Home Price Indices. The S&P/Case-Shiller U.S. National Home Price Index, which covers all nine U.S. census divisions, recorded a 4.8% annual gain in September 2014. The 10- and 20-City Composites posted year-over-year increases of 4.8% and 4.9%, compared to 5.5% and 5.6% in August.

National Index, year-over-year change in prices (seasonally adjusted):

June 2013: 9.2%
July 2013: 9.7%
August 2013: 10.2%
September 2013: 10.7%
October 2013: 10.9%
November 2013: 10.8%
December 2013: 10.8%
January 2014: 10.5%
February 2014: 10.2%
March 2014: 9.0%
April 2014: 8.0%
May 2014: 7.1%
June 2014: 6.3%
July 2014: 5.6%
August 2014: 5.1%
September 2014: 4.8%

“Other housing statistics paint a mixed to slightly positive picture,” Blitzer said. “Housing starts held above one million at annual rates on gains in single family homes, sales of existing homes are gaining, builders’ sentiment is improving, foreclosures continue to be worked off and mortgage default rates are at precrisis levels. With the economy looking better than a year ago, the housing outlook for 2015 is stable to slightly better.”

Blitzer is referring to a report last week that showed housing starts (groundbreakings on new homes) down 2.8% in October, but still at a stronger pace than one year earlier. What’s more, single-family starts showed a 4.2% increase over the prior month. Also, in October existing (or previously-owned) home sales hit their fastest pace in more than one year. (Both reports are one month ahead of the S&P/Case-Shiller report, the industry standard but unfortunately with a two-month lag time.) Taken together, the data suggest that the rapid price gains seen late last year and in the first part of this year are mostly behind us.

https://i0.wp.com/www.housingwire.com/ext/resources/images/editorial/Places/Phoenix.jpg

“The days of double-digit home value appreciation continue to rapidly fade away as more inventory comes on line, and the market is becoming more balanced between buyers and sellers,” said Stan Humphries, Zillow’s chief economist. “Like a perfectly prepared Thanksgiving turkey, it’s important for things to cool off a bit in the housing market, because too-fast appreciation risks burning both buyers and sellers. In this more sedate environment, buyers can take more time to find the right deal for them, and sellers can rest assured they won’t be left without a seat at the table when they turn around and become buyers. This slowdown is a critical step on the road back to a normal housing market, and as we approach the end of 2014, the housing market has plenty to be thankful for.”

As of September 2014, average home prices across the U.S. are back to their spring 2005 levels for the National Index (which covers 70% of the U.S. housing market), while both the 10-City and 20-City Composites are back to their autumn 2004 levels. For the city Composite indices, prices are still off their mid-summer 2006 peaks by about 15% to 17%. Prices have bounced back from their March 2012 lows by 28.8% and 29.6% for the 10-City and 20-City composites.

S&P/Case-Shiller is now releasing its National Home Price Index each month. Previously, it was published quarterly, while the 10-City and 20-City Composites were published monthly. The “July” numbers above for the National Index above reflect a roll-up of data for the three-month average of May, June and July prices.