Each month, Fannie Mae publishes a Home Purchase Sentiment Index (HPSI) to gauge how people feel about the real estate market. Last week, its July report indicated that only 17% of consumers thought it was a good time to buy a home, a decrease from 19% in June. Conversely, 83% still say it's a bad time to buy a home, an increase from 81% in the previous month.
As for consumers' perceptions of the future, 41% of the survey believed home prices would rise over the next 12 months, versus 21% who felt home prices would fall. Additionally, 31% of consumers expect mortgage rates to increase over the next year, versus 29% who believe rates will fall.
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The negative views of buying a home in this market continue to limit the number of home sales.
If you ask people in the real estate or mortgage industries, most will always say it's a good time to buy. However, Realtors and Loan Officers have an axe to grind. If people don't buy homes, their business suffers. So, it's easy to understand their optimism.
So, who is right – consumers or those whose livelihood depends upon real estate sales?
There is no simple answer. Often, it depends on whether one's perspective is short or long-term oriented.
Look at the graph below showing the average sales price of new homes sold in the U.S. between 1965 and 2023. Many thought it was a bad idea to buy a home in 2006, when the market peaked and interest rates were high. Yet, since then, most people who bought and held onto their homes have seen their values rise by over 70%.
But while that home appreciation is valid, it's also true that those who waited until 2008 or 2009 managed to get a much better deal, perhaps even buying a foreclosure whose price was 30% to 50% discounted.
Is the 2008-2010 crash scenario likely to repeat? That's doubtful, given the massive decline in the economy in 2008 from subprime loan foreclosures and the collapse of mortgage-backed securities. Yet the 2024 economy faces significant risks, including persistent inflation, elevated credit card and student loan debt and concerns about a rising unemployment rate.
So, it's possible that home prices could fall over the next year, particularly if the economy begins to weaken. However, prospective homeowners should consider several key questions, such as:
· Will the money saved by waiting a year or two be greater than what is spent on rent without building equity?
· If prices and interest rates fall, will it become more competitive among buyers to find and secure a good home?
· If prices and interest rates fall, will more investors who pay cash or get hard money loans step in to buy the better homes?
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One thing evident in past years is that when interest rates fall, demand for homes usually increases, and prices rise. Therefore, it's unrealistic that interest rates and home prices will decline in tandem unless the U.S. experiences another harsh recession.
A decline in interest rates alone is probably not enough to make housing more affordable for most young prospective homebuyers. The principal and interest (P&I) on a $350,000 30-year loan at 6.50% is $2,212 monthly. Taxes and insurance likely bring that to $2,800 a month. If the rate drops by 1% to 5.50%, the monthly payment declines $197 to $2,603. But remember that people generally qualify for a mortgage of approximately 30% of their monthly salary. One needs to earn about $9,400 monthly for the 6.50% loan and $8,700 for the loan at 5.50%. Thus, the annual income must be at least $104,000 to $113,000 and many younger people do not earn that much.
Declining home prices rather than drops in interest rates achieve greater savings. A 10% drop in home prices, even at the same 6.50% interest rate cited above, will drop the monthly payment about $260. Furthermore, the down payment and closing costs will also decline, whereas there are no reductions in the down payment or closing costs when interest rates decline. Those savings greatly help first-time homebuyers as well.
One final note – on Aug. 17, sweeping changes will hit the real estate market and how commissions are paid because of a successful lawsuit against the National Association of Realtors and various real estate brokerages earlier this year. Buyers may be forced to pay the commissions that were once paid by sellers to the Broker who brings the buyer to the home.
How this change will affect the ability of young homebuyers to secure a home is uncertain and will likely depend on various market factors. The typical 3% commission paid to the Buyer's Broker on a $360,000 home would be $10,800. Most young homebuyers struggle to get the down payment and closing costs and do not have the extra savings needed to pay a commission. While a seller can still pay the buyer's broker a commission, many may not want to, especially if buyer demand increases. And if they do agree to pay that commission, sellers may be reluctant to come off the asking price.
In summation, buyers who continue to wait to purchase a home may ultimately regret their decision unless the U.S. experiences a severe recession that triggers a large decrease in interest rates and home prices.
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© 2024 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
© 2024 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
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