COVID-19 Update: Interest Rate Hikes, Fed Intervention, and Increase in Monthly Payments

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The current economic landscape is categorized by “seemingly contradictory” elements, according to Zonda chief economist Ali Wolf. In the latest COVID-19 Update webinar, Wolf shares that things like April’s “stellar” jobs report, low unemployment, 6% wage growth and high inflation rates , go together. However, GDP growth in the first quarter of 2022 has contracted and many “soft data”, measuring consumer sentiment and expectations, are starting to trend more negatively.

“If you look at consumers, some of the sentiment data, they’re not feeling very good, whether it’s the economy or how much they’re paying each day,” Wolf says. “[Thinking] in the housing market, few people think it’s a good time to buy. »

While inflation, as measured by the consumer price index, eased slightly from 8.5% year-on-year growth in March to 8.3% in April, it there is still no inflationary relief at the moment, according to Wolf. Following its first increase in short-term interest rates in March, the Federal Reserve announced the second increase in short-term rates in April, a 50 basis point increase aimed at combating high levels of inflation and help relieve the overheated economy. While the short-term federal funds rate rose 75 basis points, mortgage rates rose more than 200 basis points, in part because “the market isn’t waiting for the Fed,” Wolf says.

The response on the ground has been varied, according to data from the Zonda builder survey. According to a survey conducted in mid-April, 30% of builders surveyed said demand was slower than expected. However, more than 60% of builders said demand was either as expected or remained stronger than expected.

“Builders see different responses in terms of what’s happening with affordability and interest rates, and consumers have different reactions to what’s happening,” Wolf says. “You have buyers who are market driven: prices are up, inventory is up and people are afraid to miss out. There are also people who are watching the market, thinking inflation is to 8.3% and costs are rising, want[ing] to lock in most of their monthly budget.

Wolf says many buyers are also discouraged in the current market, either out of fear of buying at the top or out of force due to growing affordability issues. Due to house price appreciation and changes in mortgage rates, monthly payments in many major cities, including Dallas and Austin, TX; Vegas; Jacksonville and Tampa, Florida; and Raleigh, North Carolina, are up 40% since the end of 2021.

Wolf says that while 30-year fixed-rate mortgages are approaching 6%, adjustable-rate mortgages (ARMs) represent only about 11% of outgoing loans, well below the rate of 35% at the height of the last real estate cycle.

“While nowhere near as high as the last cycle, we are seeing an increase in ARMs as people try to use them,” Wolf says. “ARMs are not inherently bad, but we know that some of the problems associated with the latest cycle [came] when the [ARM] the payment was reset and people found themselves unable to buy. »

Partly due to the rapid pace of monthly payment increases, 35% of builders surveyed by Zonda said cancellations were increasing. Despite the increase, Wolf says there has generally been enough demand from potential buyers that canceled homes will eventually be purchased.

Wolf says rising cancellations, coupled with rising monthly payments, a higher proportion of builders offering incentives and many fringe buyers deciding to opt out, suggest the market is reaching “a point of inflection”.

Price Appreciation and Buyer Cohorts
According to data from Zonda, between 80% and 90% of actively selling communities across the country were raising prices in March. Additionally, the builder survey conducted in mid-April found that 84% of builders were increasing their prices month over month.

“As we’ve seen interest rates go up and demand go down, right now we still have more people ready to buy a home than there are available houses on the lot,” Wolf says.

Among buyer cohorts, upper-tier buyers, relocation buyers, and entry-level buyers remain the most active buyers. However, the share of active entry-level buyers has declined year-over-year since April 2021, as many potential entry-level buyers are interest rate sensitive.

Housing data in real time
Zonda Senior Managing Director Tim Sullivan said builders are signaling first-time buyer prices are showing the most interest rate pressures as construction and cycle times stretch. Most automakers also continue to report that they are capping sales, according to Zonda data, while interest rate changes have different impacts depending on buyer sentiment.

“Some buyers are still pushing ahead, especially those locked into mortgages, but others are a little more scared and looking to wait,” Sullivan said. “We are also seeing signs of slowing sales.”

Sullivan says the top concerns for builders in the current environment still center on rising mortgage rates and costs. Additionally, the majority of builders are still reporting supply chain disruptions, labor shortages, land disruptions and government service challenges.

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