Three different data reports released this morning appeared to give the cumulative effect of a housing market that is aggressively seesawing to extremes: Rates hitting a new low, existing-home sales hitting a new high and rising fears that housing affordability might become an ephemeral commodity.
Freddie Mac’s Primary Mortgage Market Survey (PMMS) for the week ending Aug. 21 found the 30-year fixed-rate mortgage (FRM) hitting a new low for this year, averaging at 4.10 percent with an average 0.5 point; it averaged 4.12 percent last week and 4.58 percent a year ago. The 15-year FRM this week averaged 3.23 percent with an average 0.6 point, down from last week when it averaged 3.24 percent. A year ago at this time, the 15-year FRM averaged 3.60 percent.
Freddie Mac also reported that the five-year Treasury-indexed hybrid adjustable-rate mortgage (ARM) averaged 2.95 percent this week with an average 0.5 point; it averaged 2.97 percent last week and 3.21 percent a year ago. However, the one-year Treasury-indexed ARM bucked the downward tide and averaged 2.38 percent this week with an average 0.5 point, up from last week when it averaged 2.36 percent. At this time last year, the one-year ARM averaged 2.67 percent.
As FRMs reached new lows, existing-home sales increased to their highest annual pace of the year, according to the latest data from the National Association of Realtors (NAR). Total existing-home sales rose 2.4 percent to a seasonally adjusted annual rate of 5.15 million in July, up from 5.03 million in June. NAR stated that sales were at the highest pace of 2014 and have risen four consecutive months—but they remained 4.3 percent below the 5.38 million-unit level from last July, which was the peak of 2013.
The median existing-home price for all housing types in July was $222,900, which is 4.9 percent above July 2013. NAR added that this marks the 29th consecutive month of year-over-year price gains. Total housing inventory at the end of July rose 3.5 percent to 2.37 million existing homes available for sale, which represents a 5.5-month supply at the current sales pace. Unsold inventory is 5.8 percent higher than a year ago, when there were 2.24 million existing homes available for sale.
Yet while sales momentum is showing signs of building, the question of affordability remained a troubling concern for Lawrence Yun, NAR’s chief economist.
“Although interest rates have fallen in recent months, median family incomes are still lagging behind price gains, and mortgage rates will inevitably rise with the upcoming changes in monetary policy,” Yun said.
Yun’s warning was echoed in another data report released today by Zillow, which found that a mere dozen major metro markets could claim they were home to both affordable for-sale and rental housing. With renting becoming more expensive than in previous years, Zillow determined it will be more difficult for renters to save for a down payment on a home purchase–a situation that is complicated by a 6.5 percent year-over-year increase in home values last month, according to the new Zillow Real Estate Market Reports.
"The affordability of for-sale homes remains strong, which is encouraging for those buyers that can save for a downpayment and capitalize on low mortgage interest rates,” said Zillow Chief Economist Dr. Stan Humphries. “But the health of the for-sale market is directly tied to the rental market, where affordability is really suffering. As rents keep rising, along with interest rates and home values, saving for a downpayment and attaining homeownership becomes that much more difficult for millions of current renters, particularly Millennial renters already saddled with uncertain job prospects and enormous student debt. In order to combat this phenomenon, wages need to grow more quickly than they are, particularly for renters, and growth in home values will need to slow."
Zillow stated that the median annual income nationwide was $53,216 as of the end of the second quarter, but the company cited U.S. Census Bureau data to uncover a significant disparity in incomes based on residence: Homeowners made an average of $65,514 per year, while the typical renter earned an average of $31,888. For Dr. Anthony B. Sanders, Distinguished Professor of Real Estate Finance at George Mason University in Fairfax, Va., and author of the Confounded Interest blog, the state of American wages has been a glaring problem that has damaged the housing market.
“We know that real median household income has declined since 2007, along with average hourly wage earnings growth, along with homeownership rates and labor force participation,” Dr. Sanders wrote in a blog earlier this week. “But to have the worst real wage growth since World War II is really an embarrassment.”
Logan Mohtashami, an Irvine, Calif.-based senior loan manager at AMC Lending Group and a financial blogger at LoganMohtashami.com, questioned whether NAR and Zillow were capturing the full depth and scope of the affordability question.
“Their models are based on having 20 percent downpayments,” Mohtashami explained. “But Main Street America doesn’t have 20 percent for downpayments. Main Street America has to borrow more money and pay mortgage insurance. Things are much less affordable out there than what NAR and Zillow are saying.”
Of course, regional markets can often be more severe or less thorny than the national average. For example, things are not entirely sunny in parts of the Sunshine State.
“Affordability evaporated in Miami about two years ago,” said Grant Stern, president of Morningside Mortgage Corporation in Bay Harbor Islands, Fla. “The costs of renting versus owning are kind of aligned right now.”
Stern added that one of his clients is a renter considering the jump to homeownership, but that person found little significant advantage in making the residential switch.
“We ran the numbers and it was virtually the same,” Stern said. “The only difference was about $100 per month.”
Loren Sanders, real estate advisor and director of special projects at Encinitas, Calif.-based Sea Coast Exclusive Properties, is also no stranger to dealing with affordability issues in his market.
“There are only a small percentage of people that can afford to live on the coast,” Sanders said. “When only one of our four can afford to buy a house in North County San Diego, it’s kind of a challenge.”
Sanders added that the lingering after-effects of the 2008 crash are still shaping his local housing scene. “There is stagnation in the move-up market,” Sanders continued. “A good percent of people had their equity wiped out in the last downturn and cannot afford a downpayment.”
But, on the flip side, there is Massachusetts’ MetroWest market that is served by Bill Gassett, a real estate agent at Hopkinton, Mass.-based RE/MAX Executive Realty, who reported that affordability is not a pressing concern in his area.
“This is a fairly affluent area, and it has not changed too much here,” Gassett said. “I am more concerned about what will happen if interest rates start to rise. That will have a bigger impact on affordability than home values rising.”