Mortgage Rates Keep Falling, Prospective Home Buyers Aren’t Biting

A fundamental belief of economic theory is that declining mortgage rates will stoke the flames of the housing market. So when the Federal Reserve began their process of lowering the Fed Funds rate in July, it was expected that home buyers would race to take advantage of declining mortgage rates.

Not so fast.

The expected boost in home sales hasn’t materialized and there are several reasons for that. And they point to a confluence of events that neutralize the stimulus from lower interest rates.

Mortgage rates are moving back to historic lows

First, let’s take a quick look at what drives the interest rate on mortgages. Mortgage rates move (roughly) in tandem with the 10-year Treasury note. The yield on the 10-year note has fallen from approximately $2.23 at the beginning of July to where it sits today around $1.53.

Freddie Mac reported that the 30-year fixed-rate mortgage averaged 3.65% during the week ending October 3. The 15-year fixed-rate was 3.14%. The 5/1 adjustable-rate mortgage (ARM) averaged 3.38%.

Haven’t we been here before?

An unexpected reality that is keeping the housing market from taking off is that mortgage rates were lower than the current rate just seven years ago. At that time, many homeowners took the opportunity to move up to a bigger home which allowed first-time homebuyers to enter the market. Now, even with appealing rates, a homeowner may be sitting at a lower rate than they could get now. Or, the rate may not yet be low enough to justify diving back into the market.

This is creating two issues:

1. Move-up buyers aren’t moving up: In addition to possibly having an already appealing interest rate, move-up buyers may find a lack of supply. Homebuilders are citing a shortage of skilled labor which is slowing the market. Also, there just is a lack of homes on the market.
2. First-time buyers are shut out of the market: If move-up buyers are not moving up, then first-time homebuyers are left with a lack of affordable homes. A recent survey in North Carolina showed a “severe lack of affordably priced homes” in Asheville and Buncombe County. The survey showed the supply of houses under $200,000 and under $300,000 to be significantly less than five years ago.

Increased tariffs are raising material costs

What about new home starts? The catch-22 of building new constructions is those home buyers face a tipping point where the cost of a home exceeds the benefit of the lower rate. We live in a global economy, and when it costs more to import the raw materials needed to build a home, prices increase. According to the Associated General Contractors of America (AGC) softwood lumber tariffs – which began being imposed at the end of 2017 – have added $9,000 in additional costs to an average single-family home. Add in increased steel and aluminum prices at 19% and 6% respectively, and the cost of new construction is rising. Combine that with the shortage of skilled labor mentioned earlier and builders are not seeing the expected boost from new home buyers.

There is growing uncertainty about the economy

Economists can’t speak a recession into existence, but it seems they’re doing their best. If consumers are concerned about their personal financial health, including the possibility of losing their job, they are less likely to begin looking for a newer house or to enter the market for the first time.

And according to new data from Fannie Mae, that’s exactly what’s happening. In September, consumer sentiment in housing declined after reaching a high in August. One of the components of the survey that declined for the second straight month was the one where respondents were asked if they were not concerned about losing their jobs.

“Consumers who are pessimistic about current housing market conditions are more likely to cite unfavorable economic conditions than the prior month,” said Doug Duncan, Fannie Mae’s chief economist. “Job confidence remains high but still well shy of its July reading.”

Adding to this, only 21% of respondents in the same survey said they felt that their individual household income was “significantly higher” than it was a year ago. While there is no evidence that the economy is currently in a recession, the double whammy of stagnant income and concern of a job loss are creating an uncertain market.

Home prices are not rising as fast as rates are coming down

Another reason why there is a supply problem is that many homeowners who might be inclined to move up simply do not have enough equity in their current home. Home prices are not increasing as rapidly as rates are moving down.

Is now a good time to buy a home?

Unquestionably yes. For buyers that can afford it, have available options, and have confidence in their personal financial situation. However, this is not a typical economy. And this housing market is reflecting those realities.