More evidence points to slowing home-price appreciation. The Federal Housing Finance Agency’s (FHFA) latest data show home prices slowed in August, the first time we had negative appreciation in over a year.
We’ve been warning for some time now that the pace of home-price appreciation will likely abate. Double-digit annual price increases are unsustainable for simple economic reasons: Rising prices reduce demand. At the same time, rising prices draw in more supply, which presents more buying options and more price competition.
Supply is certainly on the rise. After trending lower through 2011, 2012 and the first half of 2013, according to NAR data. We shouldn’t be surprised, then, that homes are appreciating at a slower rate.
As for mortgage rates, they continued to trend lower this week. Bankrate.com’s survey shows the average rate on the conforming 30-year fixed-rate loan at 4.27%. Freddie Mac’s survey puts the average at 4.13%.
For the past month, we’ve been saying we expect the 30-year loan to fluctuate between 4.25% and 4.50%. We are obviously at the lower limit of that range, and we don’t expect rates to go much lower.
We say that because credit markets are already factoring in no tapering for the immediate future. This means most market participants don’t expect the Federal Reserve to reduce its monthly purchases of Treasury notes and bonds and mortgage-backed securities (MBS) this year. The good news of continued Fed support is factored into today’s mortgage rates.
Unless the economy materially worsens or the Fed ramps up its monthly purchases even more (which is unlikely), there really is no impetus for mortgage rates to fall much further. Indeed, the odds favor rates rising, because as soon as the Fed announces it will begin tapering, rates will rise. Keep in mind, the Fed will have to taper one of these days.
We long for a return to a normalized mortgage and housing market; that is, a market before the housing boom and bust. We certainly aren’t there on the mortgage side, where a normalized market would be characterized by higher lending rates, more private-market participation, and less-restrictive lending practices.
Housing is a different story. We thought we were moving toward normalization, where owner-occupied buyers’ share of the market was growing. It appears we jumped the gun.
The latest data from RealtyTrac show investors are still very much in force. Institutional investors, in particular, remain a major market player. Institutional investors – REITs, private equity, and hedge funds – accounted for 14% of all sales in September, up from 9% in August. Their activity is reflected in the percentage of all-cash purchases, which represented 49% of all residential purchases in September, up from 40% in August.
Of course, we have nothing against investors, but institutional investors are a new phenomenon. In the past, investors in the single-family rental market were primarily individuals or small partnerships. In recent years, billions of dollars of institutional money has flooded the market.
Price appreciation has abated for now, next year is forecasted to be a more balanced market with an increase of supply as more homeowners can get out from under their debt and most likely single digit appreciation at best. Mortgage rates will increase at some point and impact home sales; for every 1% rates rise it decreases a buyers purchasing power by 10%. We all long for a healthy, balanced market with normal appreciation without artificial stimulus. Let’s look toward 2014 as that year!
Until next time,
Patti Chalker
John L Scott