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November 2022

Mortgage applications fell 1% and were 41% lower year over year

Mortgage application volume barely moved as of the end of October, falling 0.5% compared with the previous week, according to the Mortgage Bankers Association's seasonally adjusted index. Rates, meanwhile, are still near a 22-year high.

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($647,200 or less) decreased to 7.06% from 7.16%, with points falling to 0.73 from 0.88 (including the origination fee) for loans with a 20% down payment. That rate was 3.24% the same week one year ago.

The slight drop was enough to move the needle a tiny bit on refinance demand. Those applications rose 0.2% for the week but were still 85% lower than the year before. There are now precious few qualified borrowers who don't already have a rate lower than what is being offered today.

Real estate agents and homebuilders alike say buyer traffic has slowed to a crawl. I am seeing no sense of urgency, and some may be waiting for rates to pull back more significantly.

New strategy for millennials as they enter the real estate market

A growing number of young adults are building wealth through a different homeownership path, prioritizing buying an investment property before a primary residence, according to a new survey by Mynd, a company that leverages technology tools to help investors buy, finance and manage single-family rental properties.

Forty-three percent of people younger than 40 say they are considering becoming "rentvestors," who continue to rent their own home while shoring up income from an investment property, Mynd's 2022 Consumer Insights Report shows. That compares to just 9% of baby boomers and 27% of Gen Xers who are using the same wealth-building strategy. Some first-time investors see this as an opportunity to make more money and better afford a lifestyle in larger, more expensive markets.

Opendoor is the poster child for a housing market slowdown

The San Francisco-based iBuyer reported a net loss of $928 million in the third quarter - more than 17 times what it lost in the second quarter, the company said recently in an earnings release. Most of that loss was attributed to a $573 million write down in home values. The firm is operating under the assumptions that "current trends" of home prices dipping will continue and potentially worsen. Opendoor anticipated a slowdown, but transactions have halted, and prices have dropped much faster and sharper than its forecast.

Opendoor's home purchases have also drastically slowed, with the company buying about 8,400 homes in the third quarter, compared to more than 14,000 the prior period. Over the last few months, Opendoor has been scrambling to save cash, most recently disclosing it would lay off about 18 percent of its workforce, or about 550 people.

Opendoor has stuck to iBuying - using technology to buy and sell homes - over the last two years, while others have exited the market altogether. Zillow announced last November it would no longer buy and sell homes, citing market volatility and a flawed algorithm. Zillow also will lay off 25% of staff.

Calm your housing bubble fears, here are some tips:

We all remember the 2008 housing crash, when your own home's value plummeted. Many watched parents, friends and others struggle to keep up with their mortgage payments, scaring them off their own homeownership path. Concerns about a "housing bubble 2.0" may come from a deep place, so have no fear and know that your feelings are legitimate.

The kind of subprime lending that was blamed for the 2008 crash is a much smaller and more regulated part of the market today. Lenders and regulators do not want to make the same mistake of lending to people who cannot repay the mortgage. Therefore, the credit scores of mortgage approvals have been high. The typical credit score for a mortgage borrower was a near-record 776 in the first quarter of 2022. During the Great Recession, it dipped to 707. Plus, for adjustable-rate mortgages, which have fluctuating interest rates over a set period of years, borrowers nowadays must show they can afford the fully reset rate.

The nation is roughly 3 million homes short of meeting buyer demand, Freddie Mac estimates. NAR has called for a "once-in-a-generation response" to the supply crisis. About 1.2 million single-family housing starts are predicted for 2023-still far from the 2 million-plus in the early 2000s, according to Statista data. Purchasing a house is the top accomplishment postgraduate students aspire to achieve-more than getting a successful job, getting married, having a baby, or traveling, according to a Grand Canyon University survey. There is still too much real demand and too little inventory. Affordability has taken a hit with higher [mortgage] rates, but people still want to buy homes.

Locking in a fixed-rate mortgage now will protect homeowners against future increases in housing prices. Such an opportunity doesn't exist when you're renting, and rental prices have climbed drastically over the last year. Plus, renting doesn't offer the ability to build equity.

The housing market has showed recent signs of slowing. But based on present evidence, there is no expectation that a fallout from a housing correction would be comparable to the 2007-09 global financial crisis in terms of magnitude or macroeconomic gravity. If you are a home seller, remember to price the home right for the changing market. Be more realistic with your expectations and be patient.

Possible economic downturn likely to be mild

A contracting economy typically means a recession, but other economic indicators are likely to mitigate the effects of the slowing economy, says NAR's chief economist Lawrence Yun.

The country isn't officially in a recession yet, despite two consecutive quarters of national contraction of the gross domestic product, a commonly cited indicator of an economic downturn. And several healthy economic trends, including a robust job market, coupled with new efforts to boost affordable housing could stave off a more serious slump.

New guidance from the Treasury enabling state and local governments to use leftover emergency COVID-19 funding from the American Rescue Plan to create affordable housing should help ease the inventory crisis and counteract the effects of a tightening economy. But the National Bureau of Economic Research, the council that watches over U.S. business cycles, has yet to declare a recession.

There are two major factors at work counteracting current economic conditions:

  • Job creation is robust. Total payroll jobs were over 150 million in early 2020 before the onset of the pandemic, Yun said at NAR's Real Estate Forecast Summit last week. While COVID-19 shutdowns precipitated a steep decline in jobs, each month showed strong job creation after the restrictions were lifted. Though there is variation across the country, Yun says, the job market has largely recovered. "We are essentially at the same level of jobs and W-2 employment now compared to pre-COVID days," he said. Data from the Bureau of Labor Statistics shows that right now, there are more job openings than unemployed people.
  • Commercial real estate is growing. Though a recession typically means bad news for commercial properties, the commercial market as a whole is flourishing despite a stagnant office sector, Yun writes in a recent REALTORĀ® Magazine column. Rental demand is booming, and rents are up significantly. Demand for warehouse space has surged as retailers stock up to avoid supply chain disruptions. Hotel bookings, air travel and park attendance are now above pre-pandemic levels. All this increased activity has led to high demand for new commercial construction. "The improving construction sector means that any recession will be mild," Yun said.

    Despite the positive economic signs, falling homes sales remain a concern. "Home sales are down largely because mortgage rates have risen sharply. If interest rates rise further, then home sales will decline even more-even if there is no recession." Another factor that will help in the short term is employers finding a way to match workers to openings and fill jobs, Yun said. "We still need workers. In an environment with rising mortgage rates, what will drive homes sales is jobs."

    October market statistics for Santa Cruz, Monterey & the Bay Area

    Comments: OK, some interesting results for October. Santa Cruz County new listings down 27.8% from Sept; Monterey County down 24.5% and Santa Clara down 21.8%. Sales in Santa Cruz down 19.2%, Monterey County down 20% and Santa Clara down 16.7% overall. Now here is the fun part: median prices were slightly up in Santa Cruz and Santa Clara and stayed basically the same In Monterey. In addition, the list to sales price ratio also increased slightly in Santa Cruz and Santa Clara with Monterey down just a bit. Days on market showed no notable change from September as all three counties have been increasing since July. So, the end all be all is inventory is still low and prices are still high! (Display of MLS data is deemed reliable but is not guaranteed accurate by the MLS)

    22sep oct