Mortgage Rates Drop to Lowest Level Since January 2018

Which should be good news for anyone in the housing market; an assumption that may be incorrect. Historically when interest rates are low housing prices rise as it is an inverse relationship. Yet the years since the Great Recession have defied historical norms concerning economic activity, we may be witnessing the beginning of the longer-term retrenchment in housing values. Of note we have now been in the longest economic expansion in the history of record keeping for such matters.

Let me begin with the basics….with the lowest mortgage rates available in almost 18 months, (on June 5, 2019 the average rate on the 30-year, fixed-rate mortgage  4.10% and average rate for 15-year, fixed-rate home loans is 3.57%) combined with the spring/summer selling season the real estate market should be reacting in a positive manner. However while rates may be dropping the rates are not compensating for the what some perceive (and I agree) as a price inflated housing market.

Total mortgage application volume increased 1.5% last week from the previous week and 12% from a year earlier, according to the Mortgage Bankers Association’s seasonally adjusted index. The gains were driven by refinances. In more detail total refinance volume rose 6% from the previous week and was nearly 33% higher than a year ago, when interest rates were 52(.52%) basis points higher. The refinance share of mortgage activity increased to 42.2% of total applications from 39.7% the previous week.

Yet mortgage applications for home purchasing fell 2% for the week and were barely 0.5% higher than a year ago. Many suggest the high prices in the markets with high demand continue to sideline buyers, especially first-time buyers, who are a growing segment of the market. While many argue prices need to come down the reality is construction costs including labor and materials, raw land and permits fees have all increased since the Great Recession and those costs, you guessed it are passed onto the homebuyer.

An additional issue for millennials who are aging into their prime home-buying years; they are saddled with debts, are likely paying high rents and are facing one of the least-affordable markets in decades.

The real estate market is truly in a conundrum. While low interest rates should spur activity under the same logic that low interest rates should be generating business activity and investment it is simply not happening. While I have written about the luxury housing market showing signs of weakness I am witnessing it even in the entry level marketplace.

Recently I listed a condominium in Monaco Place in SE Denver, a complex that attracts many first-time buyers due to location (walk to neighborhood services and light-rail) and affordability. The unit  2BD/1.75BA w/ in-unit W/D, central air, fully renovated including new stainless steel kitchen appliances, flooring, bathrooms and private patio. HOA dues include heat, A/C, water, sewer, trash and common area maintenance including an indoor pool, clubhouse and workout. The unit was listed at $199,900 (of note comparable units from prior 6 months sold from $180K-$220K based on condition and views, with the median sale being $199,000).

After two weeks on the market and with full disclosure we did receive multiple offers finally selling for $205,000 with a ($2,500) concession AND full payoff of the special assessment of ($6,000). Thus the actual sale price was $196,500.  However 6 month prior the unit would have received multiple above asking offers within the first 48 hours and would have been under contract within 3-5 days, not two weeks.

Was the seller complaining? No he was astute enough to purchase the unit during the Great Recession. The buyers should be thrilled as not only was there purchase price below comparable units from the past six months but even with a 5% down payment, their Principal, Interest, Taxes and Insurance (PITI) and HOA dues combined are still lower than the monthly rent the unit was generating in its pre-renovation condition. The above transaction advises to me we are moving towards a market closer to equilibrium. If there are continued issues concerning worldwide trade and a shock to the equities market we may accelerate into a buyers market very quickly.

 

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