December 2019

Mortgage rates may have dropped, but where are all the buyers?

Year-over-year Change in Active Inventory

During periods when the average 30-year fixed mortgage rate is decreasing, the amount of active inventory typically decreases. During periods when the average 30-year fixed mortgage rate is increasing, the amount of active inventory typically increases.
Month-Year Avg. 30 Year Fixed Mortgage Rate Total Active Inventory Median Sale Price (National) Monthly Mortgage Payment (P&I)
June-2019 3.803% 736,128 $245,000 $913.56
November-2018 4.866% 763,364 $218,500 $924.10
June-2018 4.570% 787,286 $228,000 $931.80
November-2017 3.922% 717,039 $208,833 $790.11
June-2017 3.904% 804,360 $217,232 $820.09
November-2016 3.770% 787,456 $196,875 $731.20
June-2016 3.568% 894,023 $206,000 $746.30
November-2015 3.943% 879,588 $180,914 $686.18
June-2015 3.983% 978,279 $195,000 $743.19
November-2014 3.998% 942,080 $170,000 $649.09
June-2014 4.163% 1,029,428 $184,500 $718.56
November-2013 4.255% 914,123 $162,000 $637.93
June-2013 4.070% 942,109 $179,000 $689.45
November-2012 3.352% 912,327 $151,000 $532.52
June-2012 3.675% 1,051,325 $159,250 $584.60
November-2011 3.993% 1,103,545 $140,000 $534.22
June-2011 4.510% 1,270,073 $150,000 $608.74
November-2010 4.300% 1,284,327 $144,000 $570.09
June-2010 4.738% 1,355,947 $158,500 $660.49
November-2009 4.875% 1,153,114 $150,000 $635.05
June-2009 5.420% 1,243,185 $155,000 $697.85
November-2008 6.088% 1,306,243 $154,500 $748.01
June-2008 6.320% 1,441,017 $177,500 $880.79

The benefits to buyers of low interest rates can be offset by a lack of inventory.

Historically, when mortgage interest rates are low, an influx of buyers enters the market. However, as a real estate professional, you understand how other factors can influence buyers’ decision-making, even discouraging some potential buyers from home shopping. This appears to be the case today.

Perhaps the most prominent factor offsetting the attractiveness of lower mortgage rates is an inventory shortage. Since 2012, inventories have not kept up with the number of buyers.Footnote1 The chart above illustrates this point, with the three consecutive peaks in inventory expansion diminishing over time.Footnote1 This lack of supply has increased competition and driven up home prices.

Estimated Monthly Mortgage Payment Decreases in mortgage rates typically results in lower estimated monthly mortgage payments, but the most recent decrease in rates has negated the estimated monthly savings because of the growth in median sales price.

Recently, from November 2018 until June 2019, median home prices rose over 12% — from $218,500 to $245,000.Footnote1 This asset rise added $26,500 to the price of a median house. During this same time period, already low mortgage rates dropped another percent — from 4.87% to 3.80%,Footnote2 which translated into a $25,000 drop in interest rate costs over the life of a 30-year fixed mortgage.

The net result, unfortunately for the buyer, is that the home price increase more than canceled out the interest savings!

There’s another direct outcome of this recent price increase. Based on a 20% down payment, the $26,500 cost increase added $5,300 to the down payment itself. This additional initial cost alone could price many potential homebuyers out of the market.

The large influx of millennials entering their prime home buying years will increase competition and contribute to the inventory shortage too. The clear message to builders is there’s a great opportunity to respond with new construction nationwide, especially of entry level-priced homes.

1Source data: CoreLogic.

Data date: 8/20/2019

 

2Source data: Freddie Mac.

Data date: 09/02/2019

More from this month's issue