Lending and Real Estate: A Q3 Market Overview

In the fast-paced world of mortgages and lending, it's essential to keep a finger on the pulse of industry trends and developments. The third quarter of 2023 has brought about significant changes, impacting both potential homebuyers and sellers. As part of our webinar series, Relocation Explained, Michael Farner, CRP, GMS-T, AMP, Vice President of National Sales, Strategic Home Lending Partnerships and Relocation - Huntington National Bank, gave his take on what’s happening in the Q3 market with its evolving landscape of mortgage rates, housing inventory, and how these factors affect the decisions of home buyers, home sellers, and relocating employees.

Beginning in early August 2023, the 30-year fixed-rate mortgage began a steady climb, reaching 7% and was continuing to rise as of the publication of this blog, pushing the national average beyond 7%. Predicting the exact trajectory of mortgage rates is challenging, but experts like Farner suggest that we may be approaching an upper limit, with 8% rates not considered a sustainable market norm.

“Throughout the last year we've really been somewhere between 5% and 7.5% (interest rates), and a lot of the thought coming into this year was that we had hit that 7% high mark in the fall of last year and that we were going to start to see a gradual decline in interest rates throughout this year. But we all know what happened with inflation and how that really started impacting how the Federal Reserve was looking at interest rates and raising those interest rates. We've been steadily increasing throughout the year and we're back above where we were at that high watermark last fall. The good news is that there haven’t been drastic increases,” says Farner.

Farner pinpoints the origin of his optimism – the wild fluctuations of the 2022 market in contrast to 2023’s high but steady market. He specifically refers to the initial rate increase in January 2022 – when a prolonged 3% rate jumped up to 4%-4.5% virtually overnight. Most experts like Farner, who keenly watch the market, encourage keeping it all in perspective, especially for employees who are in the middle of a relocation.

"Most people are comfortable whenever they know that the market is steady and that they’re not going to see those large increases or a robust movement in the market,” says Farner. “The nice part about the current market is that even though rates are high, we're not seeing that rapid movement,” says Farner.

The impact on the market

With interest rates remaining relatively steady, Farner believes buyers will at least have a sense of predictability regarding their mortgage rates throughout their home-buying journey, but the market continues to shift in other ways:

• Buyer activity is lagging: Despite steady, higher interest rates, the market faces a major challenge: a scarcity of new listings. Higher rates make homeowners hesitant to move and give up their lower, average 3% rates. This obstacle reduces buyer activity as fewer homes enter the market.

• Buying power takes a hit: Today's interest rates profoundly impact buying power, a fact many potential buyers find challenging. According to Farner, rising rates significantly affect home affordability. Consider this scenario from just 18 months ago, when rates were at 3%. A $500,000 home purchase resulted in a $2,100 monthly payment, totaling $758,000 over 30 years, including about $250,000 in interest. Fast forward to today, with a 7% interest rate on the same mortgage amount. Monthly payments surge by nearly $1,200, costing new buyers $1,200 more per month. Over the loan term, this amounts to an extra $275,000 in interest. Even with expected rate decreases, a fraction of this $500,000 interest rate difference still adds $1,200 to the monthly payment, dissuading many from selling, buying, or moving in today's market, especially as rates rise.

• First time home buyers still struggle: In certain markets like coastal cities, Silicon Valley, and areas with ongoing home price appreciation, a $500,000 mortgage difference between 3% and 7% interest rates equals a $1,700 monthly payment increase, posing a challenge, especially for first-time buyers. This intensifies pressure on home value appreciation as rising rates price out potential buyers. For instance, someone with a $70,000 income and a $20,000 down payment could afford a $317,000 house at 3% but only a $230,000 house at 7% interest, a $90,000 affordability drop due solely to rate increases. With recent rapid property value appreciation, the $229,000 home affordable today may not meet needs compared to the $320,000 option just two years ago. Smaller down payments are common, with first-time buyers often relying on gift funds. While some regions, like the Midwest and South, show housing market strength, areas with higher home prices face significant challenges due to rising interest rates, reshaping the national real estate landscape.

• Price appreciation and recession concerns remain: While the frenzied price gains seen during the peak of the COVID-19 pandemic have subsided, year-over-year price growth remains steady at around 3%. The key question is whether this trend can be sustained, especially in the face of rising inflation and interest rates. Experts like Farner are cautiously optimistic about the improbability of a housing market crash. They believe that unless interest rates continue to spike significantly, we are likely to see a relatively stable real estate environment. The shortage of housing inventory, combined with a reluctance among homeowners to sell, remains a driving force behind this trend.

• New home sales gain momentum: More buyers, including relocating employees, are now considering new construction options, attracted by the absence of existing mortgage rate factors, most notably the ease of buying a brand-new home from a seller who’s unburdened by a 3% interest rate. This growing trend of construction loans and relocating employees engaging in construction-to-permanent financing is directly linked to inventory scarcity. Statistics show that new home inventory now accounts for nearly 30% of the total housing market, a substantial increase compared to just 5% a decade ago. Experts believe it’s a trend that is expected to persist, particularly in metropolitan areas where new home construction is flourishing.

What does the future hold?

Despite only 18% of consumers seeing the current period as favorable for home purchases, careful financial planning is essential, especially when it comes to mortgages, and seeking out expert advice and assistance has never been more critical. For buyers, working with preferred lenders can unlock access to competitive rates, tailored solutions, and an expedited mortgage process that can give them the advantage when buying a home. For sellers, these lenders can maximize property value in a dynamic market.

Enlisting help from relocation experts can also help relocating employees maneuver the complexities of the real estate market. Some of the numerous services they can provide are market research and analysis to understand housing trends, home finding support based on preferences and budget, area orientation for informed decisions, negotiation assistance, temporary housing arrangements, guidance in selling current homes, financial counseling, legal and documentation help, home inspections, and post-move support to address any concerns with the new property.

In this ever-evolving landscape, partnering with mortgage and relocation experts emerges as a strategic choice, ensuring the right financial partner is there to help navigate the intricacies of the market and make homeownership a reality during these challenging times.