By Jacob Passy
To cap it all off, mortgage rates have continually fallen throughout 2019 to date. Currently, the 30-year fixed-rate mortgage is averaging 3.82%, roughly a two-year low, according to Freddie Mac. So far this year, mortgage rates have only increased on a weekly basis six times.
Historically, that’s been a recipe for a home-buying frenzy. “We are in an extremely interest-rate-sensitive housing market,” said Daren Blomquist, vice president of market economics at Auction.com.
In the past, home buying activity has gone up when rates have gone down, and vice versa. “There’s a lot of hopefulness that cycle will repeat in 2019,” Blomquist said.
And yet, consumers haven’t shown much interest in buying homes these days. Last week, mortgage applications for home purchases only rose 10% from the previous week, despite mortgage rates being at a two-year low. And the week before that, mortgage applications for home purchases actually dropped by 2%, according to data from the Mortgage Bankers Association.
The most recent data for home sales isn’t much more positive. Pending home sales fell for the 16th consecutive month in April, according to data from the National Association of Realtors. Economists had predicted a 0.5% increase; instead sales dropped by a seasonally adjusted 1.5%.
So why haven’t home sales rebounded? Here’s what housing market experts had to say:
Move-up buyers are facing a ‘triple whammy’
In recent years, some have suggested that there could be a large swath of homeowners who were “rate-locked.” The argument goes that many people who already own their homes are sitting on extremely low interest rates — and the higher mortgage rates that were the norm throughout much of last year acted as a deterrent keeping them from shopping for a new house.
If that were broadly true, though, you would expect home sales to rev up more than they have. “Rates are clearly not the only factor people consider,” said Danielle Hale, chief economist at Realtor.com.
(Realtor.com is operated by News Corp (NAS:NWSA) subsidiary Move Inc., and MarketWatch is a unit of Dow Jones, which is also a subsidiary of News Corp.)
‘A lot of the financial incentives that a move-up buyer would have had a couple years ago no longer exist.’
—Rick Sharga, mortgage industry veteran
Interest rates are just one piece of the puzzle for move-up buyers, those who already own a home and are looking to buy a larger or otherwise more expensive property. While the pace of price appreciation has slowed, home prices are nevertheless at all-time highs across many housing markets nationwide, offsetting the savings a move-up buyer could expect thanks to today’s interest rates. (Not to mention that many of today’s homeowners who bought their homes after the housing crisis have even lower mortgage rates than what’s on offer today.)
Making affordability matters worse, inventory remains quite constrained except at the luxury end of the market. As a result, move-up buyers have few options of properties to move to and will face more competition for homes, which can raise prices.
And then there is the fallout from the recent changes to the tax code. Current homeowners are grandfathered into the previous mortgage interest deduction, which is higher than what consumers can get nowadays. Plus, would-be move-up buyers may be wary of higher property taxes, now that the deduction for state and local taxes has been capped.
“You’re facing a triple-whammy right now,” said Rick Sharga, a mortgage industry veteran and CEO of CJ Patrick Company, a real-estate and financial services consulting firm. “A lot of the financial incentives that a move-up buyer would have had a couple years ago no longer exist.”
First-time home buyers have nowhere to go
In many ways, first-time home buyers stand to benefit most from today’s lower mortgage rates because of the real savings they represent.
Between May 2018 and May 2019, the median U.S. home listing price rose to $315,000 from $297,200, according to data from Realtor.com. But a homeowner who makes a 20% down payment could expect to spend nearly $45 less on monthly mortgage payments, for an annual savings of more than $500, thanks to today’s lower rates.
But lower-rates haven’t stirred up activity among existing homeowners. “If people aren’t moving up, that tier of housing they’re living in isn’t available to people who are starting out,” Sharga said.
Forecasts don’t provide much comfort
Real-estate buyers remain upbeat about what the rest of 2019 holds.
Throughout the year, there has been a substantial increase in investors purchasing homes at foreclosure auctions, Blomquist said. “These are typically folks who are going to flip homes,” he said. “And they are counting on the market to bounce back.”
Whether low interest rates will play a role remains to be seen though. Economists predict that the Federal Reserve will soon cut rates — mortgage rates follow the path of the 10-year U.S. Treasury note (XTUP:BX:TMUBMUSD10Y) — but that interest rate cut may already be baked into the mortgage rates currently on offer.
‘It’s really difficult to forecast where rates are going to go right now because there’s so much uncertainty.’
— Danielle Hale, chief economist at Realtor.com
A lot also depends on the broader state of the economy and namely, whether the trade war will continue.
“It’s really difficult to forecast where rates are going to go right now because there’s so much uncertainty,” Hale said. “Anytime there’s a lot of uncertainty that just sets the market up for disappointment.”