As mortgage rates continue to rise, eventually the housing market will evolve from its current crazy pace to one that is much more tolerable.

The Coming Change

The sharp rise in mortgage rates from 2.65% during the first week of January to 3.09% today is just the beginning of rising rates.

The Los Angeles Lakers reached the playoffs 10 years in a row between 1995 and 2004. They hoisted the Larry O’Brien Championship Trophy three times between 2000 to 2002. The team was stacked and included Kobe Bryant, Shaquille O’Neal, Derek Fisher, and Rick Fox. What happened in 2005? Shaquille O’Neal was traded to the Miami Heat and Derek Fisher signed as a free agent with the Golden State Warriors. The Lakers won only 34 games and missed the playoffs for the first time in 11 years. In sports, phenomenal teams do not last forever.

Housing is in the midst of its own playoff run and has been a Hot Seller’s Market since February of last year, 14-months straight. It is the longest since the 18-month streak that ran from March 2012 through September 2013. What happened in the summer of 2013 to end the run? The market decelerated because of higher mortgage rates.

In 2013, there was very little supply and low mortgage rates were juicing demand. Doesn’t that sound familiar? A low supply and a truckload of demand? The difference between 2013 and 2021 is that the supply of available homes to purchase today is drastically lower and demand is a bit less due to the lack of available homes to purchase. 

The San Diego County active inventory in 2013 was the lowest level since tracking began in 2012 (prior to this year), starting the year with 4,329 homes. It remained at that low level until April when it finally began to rise. Mortgage rates were at 3.34% in January 2013 and had increased to 3.63% in March. In June, rates increased to 3.9%, and they reached 4.37% in July. The active inventory increased from 4,466 homes at the end of March to 6,294 to start August, a 41% rise. Typically, the inventory peaks between mid-July and the end of August. The 2013 peak did not occur until October at 7,152 homes, a 62% rise from the low levels of March.

The late peak was due to mortgage rates reaching 4.5% at the end of August, which took a bite out of demand. Many homeowners also placed their homes on the market over the summer expecting the market to behave like it had earlier in the year with multiple offers, bidding wars, record sale prices, and sellers who got away with stretching their asking prices. Instead, they sat and lingered on the market with no success. The market had shifted. The shift could be felt in the marketplace during the summer of 2013 as mortgage rates had climbed more than 1% from the start of the year. Rising interest rates impact home affordability and demand softened, which enabled the inventory to finally rise. 

The Expected Market Time (time between pounding in the FOR-SALE sign and opening escrow) in 2013 started the year at 48 days, a Hot Seller’s Market (below 60-days) and had been hot since March 2012. It dropped to 32 days in April and then slowly rose from there. It reached 43 days at the beginning of July, still hot, but not as crazy. In September it reached 62 days, a Slight Seller’s Market (between 60 and 90 days), where it remained for the rest of the year. A Slight Seller’s Market is one where sellers still get to call more of the shots during the negotiating process, but values are not rising much at all, and there are not as many multiple offer situations. 

Housing started this year with the lowest level of homes since tracking, 2,556 homes, 41% fewer than in 2013. Mortgage rates reached a record low during the first week of January at 2.65%. Since then, the inventory has shed an additional 10%, dropping to 2,294. The Expected Market Time dropped from 36 days to start the year, a Hot Seller’s Market, to 21 days today. At 21 days, San Diego County housing is nothing short of nuts. 

Yet, behind the scenes, according to Freddie Mac’s Primary Mortgage Market Survey®, mortgage rates have risen to 3.09%. They are poised to continue to rise as inflation fears emerge with a rapidly improving economy forecasted for the remainder of the year. There is a close correlation between 10-year U.S. treasuries and 30-year mortgage rates. When the 10-year rises, so do mortgage rates. They typically rise and fall together. The 10-year had dipped below 1% for the first time ever last year, solely due to the pandemic. As a result, mortgage rates dipped below 3% for the first time ever. With multiple vaccines circulating across the country, and even more to come to market, there is finally light at the end of the COVID-19 tunnel. The recent relief bill, excellent vaccine news, an improving jobs picture, and better U.S. economic charts will all feed into a rising 10-year treasury and, ultimately, 30-year mortgage rates. 

Now experts are expecting a robust second half of 2021, just a few months away, the start of the next “Roaring ’20s.” Mortgage rates are projected now to increase anywhere between 3.5% to 4%, depending on the size of the economic boom. That is precisely where they were bouncing around prior to the pandemic, a much more normal range. These higher rates will be the catalyst to the market shift and the market will decelerate.

AN IMPORTANT NOTE: It will still be a Hot Seller’s Market. This is NOT a shift to a Buyer’s Market. This a shift from a housing market that is currently nuts, appreciating at about 1% per month, to a regular Hot Seller’s Market with normal, 4% to 5% appreciation per year. Sellers who overprice will sit and languish on the market. 

Copyright 2021 – Steven Thomas, Reports On Housing – All Rights Reserved.   This report may not be reproduced in whole or part without express written permission by the author.