Dec 2022
As real estate prices continue declining across the country the Federal Reserve has again chosen to increase interest rates. This is putting the squeeze on new home purchasers and driving those would be buyers straight back to the rental market. This month we explore the impact on mortgage purchase rates, rental markets and what that means for future lending opportunities.
Real Estate Prices Continue Falling
The U.S. housing market downshifted again in recent weeks, as it adjusted to the latest rate bump from the Fed. Prior to October 2022, the U.S. had not seen mortgage rates above 7% since 2002. That streak was broken when the 30-year fixed mortgage rate peaked at 7.37% on October 20th. Since that peak, rates have returned to a more reasonable level just above 6%, but fears of another increase are still looming.
What does this mean for the purchasing market? Mortgage purchase applications are down 42% on a year-over-year basis, according to October 2022 data from the Mortgage Bankers Association. The picture for loan refinancing is even worse with a year-over-year drop of 86%. In addition, a slumped home construction market subtracted 1.4% points from U.S. GDP in the third quarter of 2022, despite an overall economic growth of 2.6%. That’s the biggest housing contraction since 2007, according to the U.S. Department of Commerce.
As more and more potential homebuyers are being squeezed out of the housing market due to prohibitively expensive mortgage rates, a home price correction has clearly arrived. Among the 20 major U.S. housing markets tracked by the Case-Shiller Home Price Index (CSHI), cities in the West, like San Francisco (-12%) and Seattle (-11%) saw the largest price drops over the past 4 months. Overall, the housing market in the top 20 major U.S. cities has dropped by -4% since its peak in July 2022. Data is based on September CSHI which was published on November 29th.
Based on the recent developments in the housing market, Moody’s Analytics has analyzed 322 regional housing markets to estimate the housing price drop. The firm predicts all these markets will see a peak-to-trough home price decline.
Among the markets, Moody’s Analytics expects 196 markets to see a home price decline greater than 10%. That includes markets like Morristown, TN (-26%); Muskegon, MI (-26%); Pocatello, ID (-23%); Boise, ID (-23%); and Flagstaff, AZ (-22%). See table “Top 25 Declining Housing Markets” for details.
The predicted national decline of 10% is based on an average mortgage rate forecast of 6.5% throughout 2023. Moody’s Analytics prediction is largely in line with other predictions. Morgan Stanley expects national prices will fall by 10% or more between 2023 and 2024. Should the Fed raise rates even higher the decline could come faster and sharper.
Ian Shepherdson, the chief economist at Pantheon Macroeconomics, said in a recent interview that housing is in free-fall. “So far, most of the hit is in sales volumes, but prices are now falling too, and they have a long way to go.” Shepherson is more bearish on the housing market and expecting a drop "...of 15% to 20%."
Paul Krugman, a Nobel Prize winner in economics, agrees there's a severe downturn coming. Krugman expects it will be a while before higher rates really hit home prices and demand. “The Fed's rate hikes have indeed led to a sharp fall in applications for building permits. However, construction employment hasn't yet even begun to decline, presumably because many workers are still busy finishing houses started when rates were lower.”
The first markets around the country are already showing accelerating signs of deteriorating home prices, and various industry experts agree that more declines are likely on the horizons.
Silver Lining: Increasingly Affordable Markets
But its not all doom and gloom in the U.S. housing market. There are local markets where housing prices are still largely driven by market fundamentals such as the wage levels of residents, local industry and housing saturation.
One interesting metric to follow is the payment-to-income ratio. Expressed by the portion of a person’s monthly income taken up by the mortgage payment for a home, when tracked across many households over a long time, the “payment-to-income” ratio indicates whether housing prices have developed in line with wages or have become disconnected.
The table “Top 10 Most Affordable U.S. Housing Markets” compares today’s payment-to-income ratios to the averages between 1995 and 2003 for the most affordable cities in the U.S. You will notice that in markets like St. Louis, MO, Detroit, MI, and Cleveland, OH housing affordability has largely remained stable over time with only minor increases.
In contrast, the affordability of homes in cities such as Los Angeles, CA (+38 ppts), Las Vegas, NV (+30 ppts), and Miami, FL (+28ppts) has increased drastically over time. The current housing market downturn will mostly spare affordable housing markets and significantly impact markets where prices are largely disconnected from incomes.
Safeguard has facilitated loans in most of the top 10 markets listed above and we currently have loans available in and around the markets highlighted in orange.
Interest Rate Outlook
Investors and market observers alike are growing optimistic that inflation is finally cooling off. The consumer price index (CPI) for November came in below expectations, and while economists had expected an annual increase of 7.3%, the CPI only jumped by 7.1%. It is the smallest 12-month increase since January 2022. Still, the Fed has made it clear that we are not out of the woods yet on inflation.
After four consecutive 0.75 percentage points and one 0.50 percentage points increases brought the federal funds rate to a range between 4.25% to 4.75%, it is very likely that the Fed will continue to raise rates until it has reached its target of 5.25% in 2023. See chart “Federal Funds Rate 2022 and Target 2023” for an overview of the 2022 Fed interest rate hikes and what to expect next year.
This means that mortgage rates will remain high in the foreseeable future, generating downward pressure on housing markets that appreciated quickly in the past and where prices have become disconnected from wages.
What Does it Mean for Investors?
There are opportunities to benefit from the housing market, despite the downturn in 2022. If you like the high risk, high reward route, you can try the stock market or even try buying real estate in one of the depressed markets. Alternatively, if you are focused on cash flow, you can invest with first trust deed lending in one of the markets where Safeguard Capital Partners is present. Equity backed and asset secured investments mean more return for you with less risk.
At Safeguard, we offer first trust deed real estate lending options secured by actual, physical assets. Current loan-to-value ratios are very conservative and range between 50% and 70%, providing a healthy equity cushion to your investment. In addition, we offer rates between 10.5% and 12.0% out pacing inflation and most conservative investment options. Our team has spent the last 15 years creating wealth for our clients. Get your money working for you! You can reach out to us via this email or give us a call: 877-280-5771
Safeguard Makes the Difference
We currently have lending options to meet every investment need. Short term, long term, large or small; we have an investment instrument for you. Don’t sit on the sidelines watching the value of your money decrease due to rising inflation. Get your money working for you!
Reach out to your trusted Safeguard advisors today!
Managing Director: Corey Fleetwood- corey@safeguardcapitalpartners.com
Director of Operations: Andrew Reed- andrew@safeguardcapitalpartners.com
Customer Relations Manager: Walter McManigal- walter@safeguardcapitalpartners.com
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