Is relief in sight for priced-out homebuyers? Don’t hold your breath

By JEFF LAZERSON | jlazerson@mortgagegrader.com | MortgageGrader.com | October 2, 2023

Article originally posted in Orange County Register on September 28, 2023.

It’s back to the future in the land of homebuying. Much of the anxiety I’m hearing today is a lot like what I heard before the mortgage meltdown and Great Recession.

Jitters are being felt all the way from first-time buyers to move-up buyers and even property investors and speculators (flippers) who are all getting cold feet after going through the mortgage pre-approval process. There is much “awfulizing” about the larger state of economic affairs and panic escrow cancellations.

Today’s inflated home prices have scared off all kinds of buyers. Many are asking if and when the market will ever pop and drop. I polled four experts and added my own two cents.

Here’s what they had to say:

David Stevens, former FHA commissioner under President Barack Obama and retired MBA chief executive, sees nothing to detract from the current home price run-up. Not even a recession.

Stevens pointed me to national population estimates by the U.S. Census Bureau, which suggests we have in the marketplace a peak amount of 26- to 34-year-olds (the median age for first-time homebuyers is 34). With so many would-be buyers in play, Stevens sees home price pressures continuing.

“This is the biggest bubble of millennials on the demand side of housing,” said Stevens. “This will last a decade. We haven’t had this low of housing supply since the mid-80s.”

“Home prices are up 34% for anyone who bought right before the (Great) Recession. What do you get by waiting to buy?” he asked. “You only rent the mortgage rate. If you want to be a homeowner, locking in now protects you from the upside. You refinance (into a lower rate) on the downside.”

Daryl Fairweather, chief economist at Redfin, sees home prices and affordability worsening for those who choose to wait to buy.

“Regardless of whether mortgage rates hit 8% next year or 5%, I don’t see affordability improving,” she said. “If it’s 8%, prices will be flat. If it’s 5%, then we’ll see a surge in demand.”

What about moving to more affordable areas?

“There is a record share of homebuyers wanting to go elsewhere. Like Los Angeles to Riverside or Las Vegas. The Orange County metro area is mostly out of reach,” said Fairweather. “If it’s more affordable to rent, there is nothing wrong with renting.”

Raymond Sfeir, economic research director at Anderson Center for Economics at Chapman University, believes home prices will go up, not down.

“Demand is lacking. Supply is lacking even more,” he said. “Housing starts are down 13% for the first eight months of 2023 compared to one year ago. That’s 1.6 million to 1.4 million. Construction costs in 2022 were 33% more than they were in 2020.”

What about home prices?

“Expensive homes are what are really selling,” he said. “In 2021, 59% of all homes sold were under $1 million. Only 46% were under $1 million in 2022.”

We have just one contrarian in the economist forecasts.

Mark Zandi, chief economist at Moody’s Analytics, told me via email that nationwide, house prices will deflate by about 5% at their bottom a couple of years from now.

“I don’t think house prices will pop but will slowly deflate,” he wrote. “There is so little inventory given mortgage rate lock-in and given that most homeowners have lots of equity, it is likely there will not be many foreclosures and thus distressed sales at subsequently lower prices.”

Prices, he said, “will slowly deflate as households ultimately need to move due to life events like death, divorce, children, and job change and they will need to cut their price for their homes to find buyers.”

How weak house prices will be depends on the path for mortgage rates and household incomes, he said. “I expect mortgage rates to moderate back under 6% by late next year and for the economy to avoid a recession.”

So, what’s my take? I see home prices, particularly in Southern California, flattening out. Yes, inventory is terribly tight. But it doesn’t matter if you are a homeowner, or a renter (regardless of homeownership aspirations), the cost of living here has become untenable for too many.

Gasoline prices, shelter costs and even homeowners’ insurance are extreme expense whoppers.

Mortgage rates will stay elevated and may go higher as the Fed believes short-term interest rates are its best tool for snuffing out inflation. Mortgage rates tend to mimic short rates.

Whether you own, rent, or have aspirations of becoming a homeowner, California, especially Southern California, is a great place to live. But only if you can afford it.

Freddie Mac rate news: The 30-year fixed rate averaged 7.31%, 12 basis points higher than last week. The 15-year fixed rate averaged 6.72%, 18 basis points higher than last week.

The Mortgage Bankers Association reported a 1.3% mortgage application decrease compared to last week.

Bottom line: Assuming a borrower gets the average 30-year fixed rate on a conforming $726,200 loan, last year’s payment was $298 less than this week’s payment of $4,984.

What I see: Locally, well-qualified borrowers can get the following fixed-rate mortgages with one point: A 30-year FHA at 6.625%, a 15-year conventional at 6.75%, a 30-year conventional at 7.125%, a 15-year conventional high balance at 7.5% ($726,201 to $1,089,300), a 30-year high balance conventional at 7.625% and a jumbo 30-year fixed at 7.375%.

Note: The 30-year FHA conforming loan is limited to loans of $644,000 in the Inland Empire and $726,200 in LA and Orange counties.

Eye catcher loan program of the week: A 30-year adjustable, interest-only and fixed for the first five years, rate at 7.375% with 1 point cost.

Jeff Lazerson is a mortgage broker. He can be reached at 949-334-2424 or jlazerson@mortgagegrader.com. His website is www.mortgagegrader.com.

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* Specific loan program availability and requirements may vary. Please get in touch with your mortgage advisor for more information.