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The housing market continues to soften under the pressure of higher mortgage rates. While home prices have eased over the last couple of months, they are still holding up above last year’s level. Combined with the highest interest rates in nearly a decade and a half, affordability challenges continue to mount. The Fed’s renewed commitment to combat inflation by raising rates will only dampen home sales further in the coming months. Homebuilders sentiment has dipped in recent months and more developers are providing incentives, including price reductions, in order to attract buyers back into the market.


The FOMC makes fifth-straight increase to the federal funds rate: As expected, the Fed raised the target range for the federal funds rate by 75 bps on Wednesday of last week. The jump marked the third consecutive increase of this magnitude and pushed the benchmark range to 3%-3.25%—the highest since early 2008. The FOMC also announced that they foresee increasing their target rate as high as 4.6% in 2023 to combat inflation, which means the series of big rate hikes are expected to continue for the remainder or the year and into early next year. 


Mortgage demand rises despite sharply higher interest rates: According to the Mortgage Bankers Association (MBA), mortgage application volume increased last week for the first time in six weeks but remained well below last year’s levels with purchase applications running 30% behind 2021 and refinance activity down 83%. The latest gain on mortgage applications, however, was largely the result of weak Labor Day applications the previous week. Overall, applications remain below pre-pandemic levels and are expected to remain soft as buyers adjust to higher rates. According to Freddie Mac’s weekly survey, the 30-year fixed-rate mortgage averaged 6.29% as of September 22, when only the week prior it had averaged 6.02%.


Homebuilder sentiment dips further – especially in the West: The measurement of homebuilder sentiment (HMI), slid for the ninth consecutive month in September by dipping three points to 46 – slid 10 points in the West to 41. Builders blame elevated constructions costs, in addition to rising rates for their increased pessimism. As mortgage rates have risen, an already pricey housing market has become even less affordable and has resulted in less buyer traffic. Consequently, a greater share of builders have been forced to provide incentives like mortgage rate buydowns, free amenities, and price reductions to bolster sales. In fact, nearly a quarter of them reported lowering prices in the most recent data.


Housing starts rebound in August but permits decline sharply: Total housing starts surprised to the upside in August by increasing 12.2% over the month to a 1.575-million-unit pace. Single-family starts rose 3.4% while multifamily starts increased 28%. Improvements in supply chain conditions likely increased building material availability during the month, allowing builders to move forward with projects already in the pipeline. However, the skid in builder sentiment mirrors the trend decline in new home construction as building permits, a forward-looking indicator that leads housing starts by a couple of months, also plummeted 10% in August. The drop in permits reflects builders tapping the brakes on new construction in response to weaker demand and rising financing costs.


Rent for single-family homes grows, albeit at slower pace: The monthly cost of rent for single-family homes in July according to CoreLogic’s latest report, are still 12.6% higher than they were a year ago but increases are slowing down. July marked the third consecutive month were gains continued to shrink from the record high seen in April. However, recent hikes in mortgage interest rates have increased the mortgage payments for new loans and potential homebuyers may choose to continue to rent rather than buy. In addition, vacancy rates, continue to be extremely low across most major markets causing supply to be outweighed by demand.


If you're ready to discuss today's market and whether now is a good time for you to buy or sell, give me a call at (562) 900-9430.


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