American House Prices Still on the Rise
In the face of high mortgage rates, U.S. housing prices have steadily increased. Join us in this newsletter as we unravel the drivers behind this price resilience. Discover why house prices continue to thrive and the implications for investors in this ever-evolving landscape.
Mortgage Rates and the Housing Market
Traditionally, housing has been one of the sectors most sensitive to fluctuations in interest rates. However, the past two years have presented a unique scenario in the United States. As the Federal Reserve (Fed) adopted a hawkish stance, mortgage rates surged, rising from under 3% to over 7%. See chart “30-Year Fixed Mortgage Rates” for details covering the last 12 months. For the average American family purchasing a median-priced home, this translated to a doubling of mortgage payments, accounting for nearly 29% of their monthly household income by June 2023, the highest level since 1985, according to the National Association of Realtors.
Resilient House Prices
Surprisingly, the surge in mortgage rates did not lead to a decline in house prices. Although there was a brief dip when mortgage rates began to rise in late 2022, prices rebounded to record highs seen earlier in the year, driven in part by the impact of COVID-era stimulus measures on the economy. Notably, the S&P Case-Shiller index reported a 3.74% increase in house prices for the second quarter of 2023, equivalent to an annualized growth rate of over 17%. Refer to the "S&P Core Logic Case-Shiller Home Price Index" chart for details concerning the index development in contrast to the Federal Funds rate.
On a national level, the year-over-year home price index reported no change in June 2023. However, cities like Chicago, Cleveland, and New York continued to lead the way with the highest year-over-year gains among the 20 cities in June. Chicago remained at the top with a 4.2% year-over-year price increase, followed by Cleveland at 4.1% and New York at 3.4%. Meanwhile, cities in the West, such as San Francisco (-9.7%), Seattle (-8.8%), and Las Vegas (-8.2%), are still recovering from price declines observed a year ago.
The positive momentum in the housing market is underscored by the fact that 13 out of 20 cities showed price acceleration relative to the previous month, marking the fifth consecutive month of home price increases across the United States.
Factor Driving the Resilience
The surprising resilience in house prices can be attributed to a unique combination of factors. While demand for homes has decreased with rising mortgage rates, the supply of available properties has dwindled in parallel. Many homeowners secured low-interest mortgages before the Fed's rate hikes and are reluctant to sell their homes, given their favorable mortgage terms. Redfin estimates that 82% of homeowners still have mortgage rates below 5%. As a result, prospective buyers are faced with a market characterized by tight inventory conditions.
Those who choose not to buy homes in the current market are turning to renting, adding further pressure to the available supply of houses for sale. As of August 2, 2023, the rental vacancy rate stands at 6.3%, according to data from the Federal Reserve Bank of St. Louis. To provide context, the historical rental vacancy rate in the U.S. reached a record high of 11.1% in July 2009 and a record low of 5.0% in January 1978.
Role of the Fed
The Fed’s policies play a pivotal role in shaping the housing market's dynamics. Recent insights suggest that the Fed's policies and interest rate decisions are intertwined with the housing market's performance. Higher mortgage rates, coupled with limited supply, may push housing prices up and contribute to inflation concerns.
However, there's a compelling case, as highlighted by financial expert Ron Insana in a recent CNBC article, for the Fed to consider lowering rates. The spread between 10-year Treasury yields and 30-year mortgage rates is currently around 3 full percentage points, considerably higher than in normal cycles. A more normal spread ranges between 1.5 points to 2 points.
Lowering official interest rates to around 4% could reduce housing costs considerably, exert downward pressure on measured housing inflation, and potentially ease the upward pressure on inflation rates. In a housing market with tight supply and soaring mortgage rates, such a move could help balance the market and address concerns about housing affordability. It may seem counterintuitive, but it could be necessary.
Positive Outlook
Despite the challenges posed by rising mortgage rates and limited inventory, property experts like Zillow remain optimistic about the housing market's future. Zillow's latest forecast anticipates a 5.8% increase in national home prices for 2023, with transaction volume expected to decline by 17%. Looking ahead 12 months, Zillow predicts a 6.5% rise in prices from July 2023 through July 2024.
What Does it Mean for Investors?
In a competitive market with low inventory levels, it's crucial for investors to stay informed and agile. While challenges exist, opportunities can be found in specific metro areas experiencing significant growth.
At Safeguard, we understand the importance of preserving and growing your investments. We offer first trust deed note options secured by actual, physical assets, with conservative average loan-to-value (LTV) ratios of 65%. Our rates start at 10%, outpacing inflation and most conservative investment options. With our team's two decades of experience in creating and managing wealth for our clients, we are here to help you make the most of your investment opportunities. Call or email Safeguard today at 877-280-5771 and put your money to work for you!
