In the realm of homebuying, we find ourselves back in the past. The current anxiety and unease resemble those experienced before the mortgage meltdown and Great Recession.
The apprehension is widespread, affecting first-time buyers, move-up buyers, and even property investors and speculators (flippers) who are getting cold feet after going through the mortgage pre-approval process. There is a prevalent pessimistic outlook on the overall economic situation, leading to panic-driven cancellations of escrow.
The inflated home prices of today have deterred many potential buyers. People are questioning whether the market will burst and decline anytime soon. To shed some light on this, I reached out to four experts in the field and added my own perspective.
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Here’s what our experts had to say:
David Stevens, former FHA commissioner under President Barack Obama and retired MBA chief executive, believes that the current home price surge will continue unabated, even in the face of a recession.
Stevens referred me to national population estimates by the U.S. Census Bureau, which indicate that there is a significant number of potential buyers in the market, particularly individuals aged 26 to 34 (the median age for first-time homebuyers is 34). With such a large pool of potential buyers, Stevens expects home prices to continue rising.
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“This is the largest bubble of millennial demand in the housing market,” Stevens stated. “This trend will persist for a decade. We haven’t had such low housing supply since the mid-80s.”
“Home prices have increased by 34% for those who bought before the recession,” Stevens added. “What are you gaining by waiting to buy? You are essentially renting the mortgage rate. If you want to become a homeowner, locking in your purchase now protects you from future increases. You can always refinance to a lower rate if it becomes available.”
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Daryl Fairweather, chief economist at Redfin, predicts that home prices and affordability will worsen for those who wait to enter the market.
“Regardless of whether mortgage rates hit 8% or 5% next year, affordability is unlikely to improve,” she explained. “If rates hit 8%, prices will remain stagnant. However, if rates drop to 5%, we can expect a surge in demand.”
What about considering more affordable areas?
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“We are witnessing a record number of homebuyers looking to relocate to more affordable regions, such as from Los Angeles to Riverside or Las Vegas. The Orange County metro area is mostly out of reach,” Fairweather noted. “If renting is more affordable, there is nothing wrong with renting.”
Raymond Sfeir, economic research director at the Anderson Center for Economics at Chapman University, believes that home prices will only increase, not decrease.
“Demand is limited, but the supply is even more scarce,” Sfeir stated. “Housing starts have decreased by 13% in the first eight months of 2023 compared to the previous year, dropping from 1.6 million to 1.4 million. The cost of construction in 2022 was 33% higher than it was in 2020.”
What about home prices?
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“Expensive homes are the ones that are selling the most,” Sfeir revealed. “In 2021, 59% of all homes sold were priced under $1 million. In 2022, that percentage dropped to 46%.”
Within this group of economists, we have one contrarian opinion.
Mark Zandi, chief economist at Moody’s Analytics, shared his prediction via email, stating that nationwide house prices will deflate by approximately 5% at their lowest point in the next couple of years.
“I don’t believe there will be a sudden pop in house prices, but rather a gradual deflation,” Zandi explained. “Given the limited inventory due to mortgage rate lock-ins and the fact that most homeowners have significant equity, there are unlikely to be many foreclosures or distressed sales at lower prices.”
According to Zandi, prices will gradually deflate as households find themselves needing to move due to life events such as death, divorce, children, or job changes. In order to attract buyers, these households will have to lower their prices.
The extent of the decline in house prices will depend on the trajectory of mortgage rates and household incomes. “I anticipate mortgage rates to stabilize below 6% by late next year, and the economy should steer clear of a recession,” Zandi added.
So, what is my take on the matter? I believe that home prices, especially in Southern California, will stabilize. Yes, the inventory is extremely limited. However, whether you are a homeowner or a renter with aspirations of homeownership, the cost of living in this area has become too burdensome for many.
Gas prices, shelter costs, and even homeowners’ insurance have reached exorbitant levels.
As the Fed continues to believe that short-term interest rates are the most effective tool to combat inflation, mortgage rates are likely to remain high and may even increase. Mortgage rates tend to follow short rates closely.
California, especially Southern California, is undoubtedly a desirable place to live, whether you rent or own a home. However, this desirability comes at a significant cost.
Freddie Mac rate news
Freddie Mac rate news: The 30-year fixed rate averaged 7.31%, which is 12 basis points higher than last week. The 15-year fixed rate averaged 6.72%, which is 18 basis points higher than last week.
The Mortgage Bankers Association reported a 1.3% decrease in mortgage applications compared to last week.
Bottom line: Assuming a borrower secures the average 30-year fixed rate on a conforming $726,200 loan, this week’s payment is $298 higher compared to last year’s payment.
Jeff Lazerson is a mortgage broker. He can be reached at 949-334-2424 or [email protected].
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