Welcome to The Week in Annapolis Real Estate. We summarize industry and market news from major sources and put the headlines into context each week.
New home sales absolutely blow away all expectations. But will the supply hold on?
The increase in demand for homes, brought on by the “stay at home culture” of the coronavirus pandemic, has depleted the market of the available supply – which was at 5.5 months in August, according to the U.S. Census. In most cases, a six-month supply is considered a balanced market.
The situation worsens in the market for existing-home sales. It’s down 19% annually to a mere three-month supply, according to the National Association of Realtors. The demand for housing demand is robust but the supply cannot support it and this imbalance will inevitably harm affordability and hinder ownership opportunities.
Another issue facing the current market are sellers who are also buyers. Even as new listings appear on the market, another buyer is also added. Adding to the inventory issues, thousands of previously vacant homes (even rentals) have been reoccupied by owners during the pandemic crisis, taking them off the market.
In August 2019 single-family houses were up around 12% annually which is lagging behind market demand. New construction is in decline as well at just 1% over last year at this time. Homebuilders were forced to stop construction during the spring months and were unable to keep up with the soaring demand that followed in May and June.
Now, prices for existing homes are exploding, up double digits from last year at this time, due to this lack of supply. According to the US Census, the median price of a new construction sold in August was down 4%. Lower-priced homes are in far higher demand, especially from the millennium generation who are shopping for homeownership over apartments.
Could you use your Roth IRA to help purchase a house?
Most people know that a Roth Individual Retirement account is part of the savings plan for retirement. But here is another way to utilize those funds – it could help fund a purchase certain homebuyers.
As of this writing, September 2020, a maximum of $10,000 in Roth IRA earnings can be withdrawn tax and penalty-free — for a home purchase if certain requirements are met. This is in addition to being allowed to withdraw your direct contributions at any time since you already paid taxes on that money.
As home prices continue to soar, the number of cash buyers need to purchase a home continues to rise. There is the possibility some people may qualify to buy a house with less than 20% down, which may mean paying private mortgage insurance (PMI) until equity is at least 20% of the home value. PMI could run $30 to $70 a month for each $100,000 borrowed, according to Freddie Mac.
Is there a chance mortgage rates could rise in 2021?
The MBA’s (Mortgage Bankers Association) forecasts that 2020 will be the second-biggest mortgage year to date – hitting $3 trillion will put it only behind 2003 in single-family mortgage production history. They join with other economists who forecast a significant drop in mortgage production in 2021, with decline estimates in the range of $700 to $800 billion year over year.
But hang on a minute. The current administration reported that the Federal Reserve would keep rates low for the foreseeable future. Although this is true, mortgage rates and long-term treasuries most likely rise. Increased pressure on mortgage rates could hamper the refinance wave and cut overall national origination volume in 2021.
The Federal Reserve is the single biggest buyer of agency mortgage-backed securities in the world. The Urban Institute reported:
“In March the Fed bought $292.2 billion in agency MBS, and April clocked in at $295.1 billion, the largest two months of mortgage purchases ever; and well over 100 percent of gross issuance for each of those two months. After the market stabilized, the Fed slowed its purchases to around $100 billion per month in May, June and July. Fed purchases in July were $104.6 billion, 35 percent of monthly issuance, still sizable from a historical perspective.”
We need to ask what happens after a vaccine for Covid-19 and a normalization of economic activity which is expected next year. The Fed is being very careful not to commit to MBS purchases after the end of 2020.
If the fed continues to slow or even stop, which could happen, the supply imbalance will force rates higher as MBS prices drop in search buyers to take up the excess.
Unfortunately, the national debt is now at 100% of GDP, the highest level since World War II. A recent paper released states “By the end of 2020, federal debt held by the public is projected to equal 98% of GDP.
The projected budget deficits would boost federal debt to 104% of GDP in 2021, to 107% of GDP (the highest amount in the nation’s history) in 2023, and to 195% of GDP by 2050.”
FHFA Director Calabria is working feverishly to release Fannie and Freddie from conservatorship and moving at a pace to lock in as much of this as possible quickly given the risk of an administration change. There have been outcries from MBS investors, including some of the largest buyers.
For those in the mortgage industry, it doesn’t take all of these things to result in the forecasted $700 to $800 billion drops next year. Inevitably the slowing of purchases and the implementation of the capital rule alone would do it.
The forecast of the volume decline assumes only the slightest increase in mortgage rates, remaining in the low 3% range next year. Economists say the view is that we will end the year with a good first quarter in 2021 simply based on year-end overflow.
The second quarter may start off well, but the general sense is that by the third and fourth quarters the market will reflect the impact of coupon burn out and any of these events above beginning to take shape.
One thing for certain is that the Fed does not like being in this deep, we saw that following QE activity during the Great Recession. via HouseWire