Home Prices

Homebuyers and homeowners looking to refinance have been pushed into a whale of a dilemma. While one industry report shows that homeownership is quickly sliding into “unaffordable territory” in much of the U.S., mortgage rates are the most affordable they’ve been in 30 years. 

According to the just-released Primary Mortgage Market Survey by Freddie Mac, the 30-year fixed-rate mortgage is at an average of 2.65 percent, the lowest rate in the survey’s history, which dates back to 1971.

“A new year, a new record low mortgage rate. Despite a full percentage point decline in rates over the past year, housing affordability has decreased because these low rates have been offset by rising home prices,” said Sam Khater, Freddie Mac’s Chief Economist, commenting on the conundrum.

Overall savings are impressive

Freddie Mac’s survey found some interesting comparative tidbits about the shift in mortgage rates. As an example, a 30-year fixed-rate mortgage averaged 2.65 percent with an average 0.7 points for the week ending January 7, 2021, which is down from last week when it averaged 2.67 percent. 

A year ago at this time, the 30-year FRM averaged 3.64 percent. On a $300,000 mortgage, that’s a difference of more than $150 a month -- $1,209/mo. now vs. $1,371/mo. a year ago. But the real savings is in the overall out-of-pocket cost. All told, the total cost of the mortgage on the new rate would be $435,201 vs. $493,448 on last year’s rate.

For those who can swing a larger monthly payment, a 15-year fixed-rate mortgage averaged 2.16 percent with an average 0.6 points, down slightly from last week when it averaged 2.17 percent. A year ago at this time, the 15-year FRM averaged 3.07 percent. On a $300,000 mortgage, that equates to $1,953/mo. now vs. $2,082/mo. a year ago. 

More impressive is the savings on the total cost of a 15-year mortgage, dropping close to $100,000 from a 30-year note at $351,487 now vs. $374,735 with the mortgage rate a year ago.

A 5-year Treasury-indexed hybrid adjustable-rate mortgage (ARM) averaged 2.75 percent with an average 0.3 points, up a smidge from last week when it averaged 2.71 percent. A year ago at this time, the 5-year ARM averaged 3.30 percent.

You’ll need good credit and 20 percent down

While the Freddie Mac survey sounds like a no-lose proposition, the truth is that to get rates like the ones listed, the survey focuses on conventional, conforming, fully amortizing home purchase loans for borrowers who put 20 percent down and have excellent credit. Freddie Mac also noted that borrowers may still pay closing costs that are not included in the survey.

If a consumer is going to act on these favorable rates, Khater says they better do it now.

“The forces behind the drop in rates have been shifting over the last few months, and rates are poised to rise modestly this year. The combination of rising mortgage rates and increasing home prices will accelerate the decline in affordability and further squeeze potential homebuyers during the spring home sales season,” he said.

Despite record-low mortgage rates, a new industry report shows that homeownership is quickly sliding into “unaffordable territory” in much of the United States.

In its fourth-quarter 2020 report, ATTOM Data Solutions, a property data firm, found that median home prices of single-family homes and condos were less affordable than historical averages in 55 percent of counties in the U.S.

That’s a sharp increase from 43 percent a year ago and 33 percent three years ago. Without falling mortgage rates and rising wages, the company said the number would likely be much higher.

To be considered affordable, a home with a mortgage must fall within a range that requires no more than 28 percent of a homeowner’s income to pay the mortgage, property taxes, and insurance.

That required income was then compared to annualized average weekly wage data from the Bureau of Labor Statistics. The analysis showed that 275 of 499 counties analyzed in the fourth quarter of 2020, or 55 percent, were less affordable than past averages.

Rising home prices

The main reason for the lack of affordability is the relentless increase in home prices. Even with the coronavirus (COVID-19) pandemic, which briefly halted sales, prices continued to rise and demand for homes ran well ahead of homes on the market.

In fact, prices in 2020 have risen faster than wages and wiped out the benefit that buyers would normally realize from declining mortgage rates. The report found major home-ownership expenses consumed 29.6 percent of the average wage across the nation during the fourth quarter of 2020. A year earlier, the figure was 26.4 percent.

The National Association of Realtors reported that the median existing-home price in November was $310,800, up 14.6 percent from November 2019. It said prices were higher in every region of the country. 

"Owning a home in the United States slipped into the unaffordable zone for average workers across the nation in the fourth quarter as the numbers continued a year-long slide in the wrong direction,” said Todd Teta, chief product officer with ATTOM Data Solutions. “The latest housing market data shows the average worker unable to meet the 28 percent affordability guideline used by lenders." 

Conditions look bleak for buyers

Teta says the outlook remains uncertain. For now, he says it’s a seller’s market, and “things are going in the wrong direction for buyers."

There were 499 counties listed in the report, and only 41 percent of them had homeowner costs that aligned with affordability guidelines for the average wage earner. They include Cook County, Ill., Harris County, Tex., and Philadelphia County, Pa.

There were 296 counties with unaffordable major expenses on median-priced homes for average earners. They include Los Angeles County, Calif., Maricopa County, Ariz., and San Diego County, Calif.

Two industry reports show that home prices have surged in the final months of 2020, offsetting the advantage buyers got from record-low mortgage rates.

The S&P CoreLogic Case-Shiller Index, a closely watched but lagging indicator, shows that home prices rose at the fastest rate since 2014 in October, the last month for which data is available.

More recent data comes from real estate broker Redfin, which reports that the median home sale price rose 14 percent in the four-week period ending December 20. Together, the two reports show homeowner equity continues to increase while the barrier to homeownership got a little steeper.

The S&P CoreLogic Case-Shiller price index tracks prices in 20 large housing markets and shows that prices increased at a 7.9 percent annual rate in October. In September, the rate of growth was 6.6 percent.

It’s the steepest increase in six years and was fueled by low mortgage rates and a huge increase in buyers, many of whom left apartments in cities in search of more space in the suburbs and smaller cities. Presumably, the coronavirus (COVID-19) pandemic played a role.

Phoenix prices rose the fastest

Some markets saw prices rise faster than others. Phoenix led the way with a 12.7 percent increase. Seattle was next at 11.7 percent, and San Diego was third at 11.6 percent.

New York, Chicago, and Las Vegas -- all cities hard-hit by the economic effects of the pandemic -- saw price gains of less than 7 percent.

The Redfin data shows that December was an exceptionally strong month for home prices, with the median sale prices hitting $320,714 -- a 14 percent year-over-year increase. The report also shows that pending home sales -- a measure of contracts signed but not yet closed -- were up 34 percent.

Picking up momentum

The pace of activity actually increased as the year drew to a close. Pending home sales surged 30 percent in the week ending December 20. However, active listings -- the number of homes on the market -- fell 31 percent year-over-year to a record low.

"Going into the new year, it will truly be out with the old, because there will be very few homes from 2020 left on the market," said Redfin’s chief economist Daryl Fairweather. "So those who resolve to buy a home in 2021 may need to wait with bated breath for sellers to list their homes.”

Fairweather predicts that the rising prices of home will lead to more homes being listed in 2021. But he says that increase in inventory will likely go fast since the pent up demand from buyers shows no sign of letting up. 

If you’re a homeowner, your net worth may be higher than it was before the start of the coronavirus (COVID-19) pandemic.

If you’ve managed to stay employed and haven’t run up a big credit card bill, then the equity in your home has likely made you richer, thanks to the rapid increase in home values over the last six months.

ATTOM Data Solutions, a property data firm, reports that 16.7 million U.S. homes were classified as “equity-rich” in the third quarter of 2020, meaning the combined estimated amount of loans secured by those properties was 50 percent or less of their estimated market value.

That represents 28.3 percent, or about one in four, of the U.S. homes with a mortgage. It’s up from 27.5 percent in the second quarter when home values began to take off.

How the pandemic affected the market

Home sales surged once shelter-in-place orders were lifted. Many of the buyers were apartment dwellers who were suddenly working from home and decided they needed more room. Many also determined that they could continue working remotely and didn’t confine their choices to homes in the city where they worked. Single-family home sales boomed in many smaller cities.

The increase in demand, without a corresponding increase in supply, put sellers in the driver’s seat, and home listing prices -- and sales prices -- rose quickly.

Not all homeowners are benefitting, however. The report shows that around 3.5 million homes -- or one in 17 homes with a mortgage -- are considered seriously underwater, meaning the homeowner owes more than the home is worth. But fortunately, that number has trended lower during the pandemic.

"Homeowner equity in the third quarter added another pebble to the pile of markers showing that the U.S. housing market continues to defy the broad downturn in the economy this year,” said Todd Teta, chief product officer with ATTOM Data Solutions. “Home prices keep rising, boosting the balance sheets of homeowners throughout most of the country."  

Economic bright spot

Teta says housing has been a bright spot in an otherwise shaky pandemic economy. He says homeowners stand to benefit as long as the market remains strong.

Coastal real estate markets, which tend to be among the most expensive in the nation, had far higher levels of home equity in the third quarter of 2020 than other areas of the United States. 

The top 11 states with the highest share of equity-rich properties in the third quarter were all in the Northeast and West, led by Vermont, California, Hawaii, Washington, and Idaho.