Weekly Economic Update

Economic News:

Just When You Thought It Was Safe

How long will rates stay elevated?

We always say that predicting the future is futile. This year is no exception. The analysts were expecting a recession sometime this year. It did not happen. They also expected interest rates to start easing down as the year went on. Instead, as the second half of the year began, interest rates started rising again. By mid-August mortgage rates hit their highest point since November of last year. So much for paying economists big money to give us a glimpse of the future. You might have to go to the weatherman to get predictions this far off.

Speaking of the weather, there is no doubt that climate change is one of the main factors contributing to the inflation we are experiencing. This is especially true in the real estate sector where insurance rates are rising, especially in certain states. Hurricane Idalia is just the latest event to cause damage costing billions of dollars. And the hurricane season has started to heat up. Thus far, people are still flocking to areas subject to storms and wildfires, but evidence is starting to roll in that the risk of climate change is starting to factor into the decision of where to purchase a home.

Going back to the issue of interest rates, most economists are still expecting lower rates on the horizon. Though the horizon has been moved out somewhat. It will be interesting to see if the present increase in rates is reversed this fall or this will be the new normal until rates start falling. We will make this somewhat “safe” prediction about the future. The longer rates stay elevated in the Fed’s quest to calm inflation, the greater number of homeowners who will be refinancing in the future. Which is why so many are using this quote recently – Marry the house, but date the rate!

Greater Interest in New Construction

New construction demand increased from 20% to 25% in Q2 of 2023.

Higher interest rates have led millions of existing homeowners with mortgages under 4% to postpone plans to list their homes for sale, and for many prospective buyers, that supply vacuum has left newly built homes as the only game in town. That is the backdrop behind the strengthening of interest for new homes. According to the latest Housing Trends Report, between the final quarter of 2022 and the second quarter of 2023, the share of buyers looking to buy new construction rose from 20% to 25%. In contrast, the share interested in existing homes dropped from 39% to 36%, while the share with no preference fell from 41% to 39%. Interest for new homes is widespread. Between the final quarter of 2022 and the second of 2023, all regions saw the share of buyers interested in new homes increase. (Source: NAMB)

Delinquency Rates Hit All-Time Lows

Resilient job market aides in the low mortgage delinquency rates.

The delinquency rate for mortgage loans on one-to-four-unit residential properties decreased to a seasonally adjusted rate of 3.37 percent of all loans outstanding at the end of the second quarter, according to the Mortgage Bankers Association’s National Delinquency Survey. The delinquency rate was down 19 basis points from the first quarter of 2023 and down 27 basis points from one year ago, MBA said. The percentage of loans on which foreclosure actions were started in the second quarter fell by 3 basis points to 0.13 percent. “The seasonally-adjusted mortgage delinquency rate fell to its lowest level since MBA’s survey began in 1979, reaching 3.37 percent in the second quarter of 2023,” said Marina Walsh, CMB, MBA vice president of industry analysis. “Buoyed by a resilient job market, homeowners are continuing to make their mortgage payments.” Walsh noted that delinquencies fell across all mortgage types – conventional, FHA, and VA. Both foreclosure starts and foreclosure inventory also declined relative to the previous quarter. Added Walsh, “Despite low delinquency rates, there are early signs of possible consumer credit stress. Delinquencies are rising for other forms of credit such as credit cards and car loans. In addition, FHA delinquencies rose 10 basis points compared to year ago levels. On a non-seasonally adjusted basis, FHA delinquencies rose 13 basis points year-over-year and 71 basis points from the first quarter of 2023. As the economy slows and the labor market cools, homeowners with FHA loans are likely to feel the distress first. Compared to last quarter, the seasonally adjusted mortgage delinquency rate decreased for all loans outstanding. By stage, the 30-day delinquency rate decreased 2 basis points to 1.75 percent, the 60-day delinquency rate remained unchanged at 0.55 percent, and the 90-day delinquency bucket decreased 17 basis points to 1.07 percent. (Source: The Mortgage Bankers Association)

Real Estate News:

The Home Equity Piggy Bank

Home equity loans increased 50% in 2022.

With home values remaining strong across the country, Americans are tapping into their home equity to pay for renovations and debts. With low inventory in most housing markets across the country, home prices have held firm after surging during the pandemic. That means homeowners are now collectively sitting on nearly $30 trillion in home equity, according to the St. Louis Federal Reserve. As a result, originations of Home Equity Lines of Credit (known as HELOCs) and home equity loans increased 50% in 2022 compared to two years earlier, according to the Mortgage Bankers Association. “Home renovations and remodeling drove demand for home equity products in 2022, with roughly two-thirds of borrowers citing it as a reason for applying for a home equity loan,” said Marina Walsh, MBA’s vice president of industry analysis. Other reasons that borrowers gave for taking out a HELOC or home equity loan included debt consolidation and emergency cash management. A homeowner’s equity in their home can be a tremendous source of wealth. A HELOC is a revolving source of funds, kind of like a credit card, that can be tapped as needed by the homeowner. A home equity loan comes as a lump sum, often with a fixed interest rate, that can be helpful for a one-time big expense like a renovation. Home equity loans and lines of credit are secured against the value of a homeowner’s home equity, which is the difference between how much your home is worth and how much you owe on your mortgage.

A homeowner’s equity will fluctuate over time as they make payments on their mortgage and real estate market dynamics impact the current value of the home. Typically, lenders offer rates for these types of loans that are lower than for most other types of personal loans. “The housing inventory shortage, combined with home-price appreciation and a low-rate first mortgage, make home renovations an attractive alternative for many homeowners who are looking to improve their spaces,” Walsh said. “Additionally, a HELOC or home equity loan is one way to finance big home projects while receiving a tax advantage through the deductibility of mortgage interest.” “Home equity products continue to remain viable options for consumers looking to utilize their tappable equity to pay down higher interest debt, with consumer interest in home equity loans in particular, on the rise this year,” said Joe Mellman, senior vice president and mortgage business leader at TransUnion on findings from the most recent Credit Industry Insights Report. (Source: CNN)