Mortgage rates moved down noisily last this week, as the decline that started late the previous week intensified, but only for a time. The sound of rates falling to approximately 16-month lows gave way to them quietly firming up by mid-week, essentially leaving them about where they were after the Fed meeting. This means, at least compared to this week, that mortgage rates are headed back up again, even though they should still end up lower than they were three weeks ago.
With the drop-in mortgage rates so prominent in the headlines, we were asked on several occasions what it means for homebuyers. The actual answer is that while every little bit helps, it really doesn't change the picture all that much for most.
There are two ways a downturn in a mortgage can help. A borrower in the process of buying a home with a $350,000 mortgage at the beginning of July when rates were about 7% would have faced a monthly principal and interest payment of $2,329 -- but at today's 6.5%, that P&I payment would be $2,212 -- $117 less per month. This buyer can purchase the same home with less impact on their monthly budget (the $350,000 loan amount in this example is roughly the current median price, less a 20% down payment, give or take a little).
For a borrower with a $100,000 income who was shopping for homes at the start of July when rates were 7%, they might have qualified for a loan up to $276,453 -- but at today's 6.5%, this same income could carry a loan of $287,955 -- an $11,500 increase in purchasing power. This might be the difference in participating in a local housing market or not, or at least allow for an improved bid on a contested property.
At a 7% rate, to have the same PITI payment ($2,566/month) the home price would need to be $404,300, leaving a loan amount of $323,440 after a 20% down payment. This combination would also require a $109,968 qualifying income.
Considered in this way: If rates had remained at about their 7% level in July, it would have taken a $22,600 drop in median home prices to have the same "affordability effect" as the drop in rates has. Unfortunately, even if median home prices did decline by that much, this would still only leave them about where they were in... April of this year, so not all that much lower than now.
With this as a backdrop, even if we adjust the Census Bureau's most recent 5-year estimate of median family income (American Community Survey, 2022) by 4% for 2023 and another 4% for 2024, this only lifts this typical income figure to $100,206 -- still well short of the nearly $110,000 income needed to purchase today's median-priced home even with a 20% down payment and a 6.47% rate.
While existing home sales are expected to improve a bit, at least based on June's Pending Home Sales Index, any improvement in demand will have been fostered by conditions six to eight weeks ago, largely due to increasing numbers of homes available to buy. That said, the continued easing of mortgage rates in July -- well before this early August drop -- should also help to improve sales as we head into the fall, especially as the typical seasonal softening of median home prices comes back around again.
Sales of new homes are seemingly lackluster, too, at least when compared to the pandemic-affected period a few years ago. However, they have generally been running at levels that are comparable to where they were in the couple-few years leading up to the pandemic distortion, and so sales might be at normal levels. That said, one might think that sales should be stronger given the extended period of tight inventory and high costs in the existing home market.
Builders have plenty of homes available for sale and are continuing to use a variety of incentives to help keep potential buyers interested. As well, and unlike the record-setting prices for existing homes, the median price of a new home sold this June was nearly identical to a year-ago period ($417,600), down from an October 2022 record high of $460,300 and below that of a median-priced existing home.
In many cases, however, a newly constructed home isn't a suitable or direct replacement for a well-placed existing home, as much new construction takes place at greater distances from center cities, necessitating longer commutes and possibly less access to amenities, different school systems, and perhaps other concerns.
After a light calendar of new economic data last week, this week brings us updates on producer and consumer prices, which can certainly sway interest rates. We'll also get a look at changes in import and export prices, retail sales for July, builder sentiment and housing construction activity, and more. Since investors already expect at least a quarter-point cut in rates come September (if not more), a softer-than-expected tenor to the inflation data probably doesn't help rates to fall much. Conversely, steady or firming prices would see some bets on half-point cuts be unwound, and that could lift mortgage rates a little more.
The effect of this might be hard to tell though, as it will come as mortgage rates will increase, regardless. As reported by Freddie Mac this Thursday, we expect to see the average offered rate for a conforming 30-year fixed-rate mortgage rise by 13-16 basis points, erasing half or more of this week's decline.
With the drop-in mortgage rates so prominent in the headlines, we were asked on several occasions what it means for homebuyers. The actual answer is that while every little bit helps, it really doesn't change the picture all that much for most.
There are two ways a downturn in a mortgage can help. A borrower in the process of buying a home with a $350,000 mortgage at the beginning of July when rates were about 7% would have faced a monthly principal and interest payment of $2,329 -- but at today's 6.5%, that P&I payment would be $2,212 -- $117 less per month. This buyer can purchase the same home with less impact on their monthly budget (the $350,000 loan amount in this example is roughly the current median price, less a 20% down payment, give or take a little).
For a borrower with a $100,000 income who was shopping for homes at the start of July when rates were 7%, they might have qualified for a loan up to $276,453 -- but at today's 6.5%, this same income could carry a loan of $287,955 -- an $11,500 increase in purchasing power. This might be the difference in participating in a local housing market or not, or at least allow for an improved bid on a contested property.
At a 7% rate, to have the same PITI payment ($2,566/month) the home price would need to be $404,300, leaving a loan amount of $323,440 after a 20% down payment. This combination would also require a $109,968 qualifying income.
Considered in this way: If rates had remained at about their 7% level in July, it would have taken a $22,600 drop in median home prices to have the same "affordability effect" as the drop in rates has. Unfortunately, even if median home prices did decline by that much, this would still only leave them about where they were in... April of this year, so not all that much lower than now.
With this as a backdrop, even if we adjust the Census Bureau's most recent 5-year estimate of median family income (American Community Survey, 2022) by 4% for 2023 and another 4% for 2024, this only lifts this typical income figure to $100,206 -- still well short of the nearly $110,000 income needed to purchase today's median-priced home even with a 20% down payment and a 6.47% rate.
While existing home sales are expected to improve a bit, at least based on June's Pending Home Sales Index, any improvement in demand will have been fostered by conditions six to eight weeks ago, largely due to increasing numbers of homes available to buy. That said, the continued easing of mortgage rates in July -- well before this early August drop -- should also help to improve sales as we head into the fall, especially as the typical seasonal softening of median home prices comes back around again.
Sales of new homes are seemingly lackluster, too, at least when compared to the pandemic-affected period a few years ago. However, they have generally been running at levels that are comparable to where they were in the couple-few years leading up to the pandemic distortion, and so sales might be at normal levels. That said, one might think that sales should be stronger given the extended period of tight inventory and high costs in the existing home market.
Builders have plenty of homes available for sale and are continuing to use a variety of incentives to help keep potential buyers interested. As well, and unlike the record-setting prices for existing homes, the median price of a new home sold this June was nearly identical to a year-ago period ($417,600), down from an October 2022 record high of $460,300 and below that of a median-priced existing home.
In many cases, however, a newly constructed home isn't a suitable or direct replacement for a well-placed existing home, as much new construction takes place at greater distances from center cities, necessitating longer commutes and possibly less access to amenities, different school systems, and perhaps other concerns.
After a light calendar of new economic data last week, this week brings us updates on producer and consumer prices, which can certainly sway interest rates. We'll also get a look at changes in import and export prices, retail sales for July, builder sentiment and housing construction activity, and more. Since investors already expect at least a quarter-point cut in rates come September (if not more), a softer-than-expected tenor to the inflation data probably doesn't help rates to fall much. Conversely, steady or firming prices would see some bets on half-point cuts be unwound, and that could lift mortgage rates a little more.
The effect of this might be hard to tell though, as it will come as mortgage rates will increase, regardless. As reported by Freddie Mac this Thursday, we expect to see the average offered rate for a conforming 30-year fixed-rate mortgage rise by 13-16 basis points, erasing half or more of this week's decline.
