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It's a question almost everyone is asking: "Should I refinance my mortgage?" If so, what's the best way to pay for my mortgage refinance

It's a question almost everyone is asking: "Should I refinance my mortgage?" If so, what's the best way to pay for my mortgage refinance

Housing: Spring Swoon, Summer Surge

September 25, 2020 -- Although Labor Day was already several weeks ago, the calendar officially turned to fall just this week, and reports covering the housing markets during the traditional final stanza of those lazy, hazy, crazy days of summer became available this week. At the same time, we've just passed the six-month mark for the declaration of the national emergency for the coronavius pandemic, and its instructive to have a look backwards to perhaps get a sense of where we're headed this fall and beyond for housing.

Perspective about how the housing market is performing is useful in this so-distorted year. It bears remembering that pre-pandemic, the market was on track for what looked to be a rebound year; goosed by already-low mortgage rates, somewhat improved supply and more modest year-over-year price gains, sales of existing homes were on the rise, with momentum was building into February, where a 6.5% month over month gain in sales occurred. At the time, the long economic expansion was continuing, job markets were the best in 50 years, the effects of the "trade wars" of 2019 were fading and economic growth was showing signs of picking up speed.

Then the pandemic hit, crushing everything in its path. Confusion about how COVID-19 was spreading and initial lockdowns in some areas but not others caused homes to be pulled off the market and buyers to stay home. Virtual home tours and remote or quasi-remote loan closings posed a difficult and cumbersome buying climate even where homes could be bought, and by May, existing home sales had dropped by more than 26% compared to February levels. During the period that would be the heart of the typical spring homebuying season, sales just didn't happen, but this unrealized spring demand didn't go away, it just shifted to June, July and August.

What's happening with home prices? Which markets have recovered... and which still lag behind? Check out the fresh update to HSH's Home Price Recovery Index, covering price changes in 100 metropolitan areas -- and see our Home Value Estimator tool to reckon changes in your market during your ownership period!

Which brings us to today. August existing home sales rang in with a 2.4% gain over July, rising to a full 6 million annualizes rate, the highest in 14 years. With this third consecutive month of rising sales, supplies of homes available to buy at the present rate of sales dropped back to just 3 months, matching a record low; in turn, a leap in demand amid little supply meant that home prices -- already on a sharp upswing -- spiked again, with the median price of a home sold this August 11.4% above one sold last August.

Much was made of the surge in sales to previous boom-era levels, but if you step back a little from month to month changes the picture is a little different.

If we look at the average rate of home sales for last December, January and February (the closest three-month non-pandemic period) we see a 5.57 million (annual) rate of sale. Then, we review the "pandemic" three-month portion covering March, April and May, where sales slumped about 19% to an average 4.50 million for the period. Finally, looking at the June, July and August group, sales certainly have come back up compared to the shutdown period -- but only back up to an average 5.52 million rate for the period. As such, and month-to-month gains notwithstanding, we're really only back to about where the existing home market was pre-covid, give or take a little.

As we evaluate these numbers we must also consider that August sales figures represent transactions started anywhere from late June through perhaps late July, given that it typically takes 30-60 days to get a loan closed. When September's data comes it will be more representative of demand conditions in late July and August proper, and this may tell us something more clearly about the new state of the market as the spring-shifted-to-summer-sales season actually coming to a close. Although that typical seasonal demand is probably mostly spent already, there could yet be some residual lift in September sales from it. To be sure, demand conditions for homes remain strong; we have near-record low mortgage rates in place for well-qualified borrowers and the economy has rebounded strongly in the third quarter compared to the second. As well, there are also some COVID-19 effects to consider, too, as work-from-home and school-from-home has both homeowners and renters scrambling to find more suitable space. In addition, there is also purportedly some exodus from cities as folks look to escape high costs, potential for greater incidence of infection and civil unrest. So, we have plenty of demand to power sales.

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However, what we don't have is supply to meet that demand. The 3 months of supply of homes for sale in August is of course measured against the current rate of sales; cooler sales would tend to help lift the figure a bit, but that would only serve to mask the reality: According to the National Association of Realtors "Total housing inventory at the end of August totaled 1.49 million units, down 0.7% from July and down 18.6% from one year ago (1.83 million)." Already thin stockpiles are getting even thinner as we go along, and the only cure for that is more folks deciding to put their homes on the market... but if there's not much available to buy, where are they going to go?

At the same time, surging prices are starting to obliterate some of the affordability benefit produced by record low mortgage rates. August's median home price of $310,600 was probably financed with a 30-year mortgage rate of just over 3%, and given typical taxes and insurance costs the monthly payment would be $1,047.60 which requires an income of $59,476 per year to qualify. Back in February, the median price of a home sold was $270,400, the likely rate to finance it was about 3.62%, the monthly payment was $985.92 and the annual income needed to qualify for the PITI payment would have been $56,833 -- almost $3,000 less despite a relatively "high" interest rate. Increasingly, low rates have goosed demand, kicking prices higher and reducing affordability... and these are the conditions which led to a tempering sales climate in 2018 and into mid-2019.

So we have little available to purchase and declining affordability. To this, the Mortgage Bankers Association reported this week the Mortgage Credit Availability Index moved to a six-year low in August, so credit conditions are also tightening. Of course, tightening mostly occurs starting at the fringes of the market, so its likely that the effect is most pronounced on those looking for high-LTV loans, or on folks on the lower end of the credit scale, but it also affects non-QM audiences looking for alternative-documentation mortgage and even well-heeled borrowers seeking high-quality jumbo loans. These folks make up only a fraction of the market, but marginal demand is what helps keep sales moving higher, and eliminating them from the market will tend to temper activity.

In considering these variables collectively, it's hard to see how existing homes sales can continue to increase over the coming months. A lack of inventory, reduced affordability, tightening credit conditions and an economy where components remain crippled from the pandemic (leaving out even millions of homeowners still in forbearance programs) suggest to us that while we may see a small rise in sales for September that the trend of strong sales gains is set to return to trend, and that trend seems to be about where we are now, someplace in the mid 5 million range (annualized) for existing home sales.

So there will probably be some throttling of sales in the existing home market as the year wends its way to a close. In answering the question of "where are they going to go?" posed above, the answer seems to be "to the new home market", wherever that may be.

While of course affected by the pandemic shutdown in terms of both sales and construction, the new home market has been in a long uptrend since a recession-era nadir of just 270,000 sales in 2011. The uptrend here paused for about two months, then resumed with a vengeance. In August, sales of new homes rose by another 4.8%, landing at a 1.011 million annual rate of sale, the highest since 2006. As with existing homes, the surge in sales in recent months has depleted inventory to just 3.3 months of supply, but unlike existing homes, builder can simply build more to meet demand (and construction trends suggest that they are doing just that). Being able to adjust supply to better meet demand also means that price gains aren't subject to the same forces as are existing homes, and in fact, the median price of a new home sold actually declined by 4.6% in August to $315.900, only about $5K above the median cost of an existing home -- and about 5% below year-ago levels. too.

If HSH's weekly MarketTrends newsletter is the only way you know HSH, you need to come back and check out HSH.com from time to time. You'll find new and changing content on a regular basis, unique calculators, useful insight, articles and mortgage resources unlike anywhere else on the web.

In looking at the same three-month comparison groups as above, sales in the December-February period average 740,000 units, slipped about 15% to 627,000 sales in the March-May period and are now averaging 939,000 units for the June-August -- a leapt of 50% compared to the pandemic period, but also one of 26.9% above the Dec-Feb pre-pandemic average. Sales here are truly booming.

But unlike existing home sales, new home sales likely do have some upside. A long period of underbuilding means there is still plenty of catch up building to be done, and given population increases since 2006 and favorable demographics, sales of new homes should probably be averaging closer to the 1 million mark than not over time. Little to by at inflated prices in the existing home market should squeeze some demand over to the new home market as we go, and with the price difference between existing stock and new just $5,000 -- a difference in monthly payment of perhaps just $18 -- at least some buyers will be opting for new rather than fight the crowds in the existing home space. We might also mention that sales of new homes are tallied when contracts are signed; as such the August sales report reflects actual demand conditions just a few weeks ago, so the spring-now-summer sales season closed on a high note.

Relative to the spring, the economy remains fair, if probably starting to be in need of another boost before long. According to the National Activity Index from the Federal Reserve Bank of Chicago, growth remains above par but in a declining pattern since a record June jump. The 0.79 value for the NAI suggests that growth ran above the economy's potential during the period. The NAI -- an amalgam of 85 economic indicators -- seeks to show if the economy is performing above or below its "potential" or ability to grow without throwing off any excesses, thought to be a GDP of perhaps 2.6% or so. While still solid, the outsized effect of the initial fiscal stimulus on the economy has been fading, and it's not clear when or if (or what kind) of new package the Congress may be able to agree upon.

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Does mortgage history repeat? Usually. Find out what happened last week/month/year with MarketTrends archives!

Current Adjustable Rate Mortgage (ARM) Indexes

IndexFor The Week EndingYear Ago
Sep 18Aug 21Sep 20
6-Mo. TCM 0.12% 0.13% 1.92%
1-Yr. TCM 0.13% 0.13% 1.86%
3-Yr. TCM 0.16% 0.17% 1.68%
5-Yr. TCM 0.28% 0.27% 1.66%
10-Yr. TCM 0.69% 0.66% 1.80%
Federal Cost of Funds 1.053% 1.107% 1.109%
FHLB 11th District COF 0.653% 0.682% 0.678%
Freddie Mac 30-yr FRM 2.86% 2.96% 3.56%
Historical ARM Index Data

As we look for clues as to the direction of the economy, the labor market is key. We know that perhaps half of the jobs that were lost due to domestic and offshore shutdowns have been recovered, but progress since then has slowed considerably. Unemployment claims have plateaued in recent weeks, but not at levels that would suggest an improving labor market, let alone a healthy one. IN the week ending September 19, 870,000 initial applications for unemployment assistance were filed across the country, part of a near-flatline over the last four weeks. Claims for ongoing support continue to ease, though, and now total 12.6 million, but the rate of improvement here has also slowed over the past month. Next Friday, we'll get a look at the September employment report; odds favor a still-sizable spate of hiring, but even so, it will be a long while before the other 50% of jobs still missing return.

Applications for mortgage credit continue to wax and wane. While elevated compared to reference points of last year, the trend here has also been pretty flat overall. According to the Mortgage Bankers Association, mortgage applications rose by 6.8% in the week of September 18, pushed higher by a 3.4% increase in requests for purchase-money mortgages but also by an 8.8% jump in those for refinances, the strongest weekly increase in about six weeks. The prior week in this series included the Labor Day holiday, so there was probably a minor bit of pent-up demand expressed in the latest week, too. Mortgage rates remain both favorable and stable near record lows, so there will continue to be excellent opportunities for both homebuyers and homeowners to find deals, provided they are in the mainstream and can qualify.

With regard to mortgage rates, the landscape here has been very flat. The economy is performing about as well as it can, the Federal Reserve is doing virtually all it can or needs to do, and Congress is still undecided about the scope of new stimulus. With this as a backdrop, the slight ebb and flow of rates is related almost solely to which way investors are leaning at any given moment, and there's no real trend to be seen at the present time. This will probably change soon; a stimulus deal might move things a bit, and certainly what promises to be the messiest election in U.S. history will have some effects on the markets as we close in on November. Next week has a big bunch of both end of and first week of the month data, but as much of it comes late in the week, mortgage rates probably won't be affected by it. With this in minds, we think we'll see another week of little change in the average offered rate for a conforming 30-year FRM as reported by Freddie Mac next Thursday, perhaps just a basis point or two, probably downward.

After multiple record lows for mortgage rates this summer, could more of the same be on tap as we head into the fall? Could be... but have a look at our latest Two-Month Forecast and see what we think the changing season will bring.

We just completed our mid-year review of our 2020 Outlook . COVID-19 crushed quite a few of our expectations, but others seem as though they will remain on track. Have a look.

For a really long-run outlook, you'll want to check out "Federal Reserve Policy and Mortgage Rate Cycles".

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In most areas, home prices have been rising for years. If you're curious about how much home equity you have -- or will have at a future date -- you should check out HSH's KnowEquity Tracker and Projector, our unique home equity calculation and forecasting tool.

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