Will home prices go up or down? Will mortgage interest rates rise or fall? Will there be a recession? Will there be enough homes to buy? While the housing market adjusts to market realities, the questions remain the same.

Macro and micro economics drive homebuying, such as inflation, borrowing costs, supply and demand, housing availability and local jobs, which is why housing markets are highly individual. Nationally aggregated statistics on housing sales such as home prices and mortgage interest rates only indicate trends, and even those may or may not apply to your local market conditions.  So, what do the trends indicate?

Inflation and the Federal Reserve

Inflation appears to be ticking upward again, prompting the Federal Reserve to announce that borrowing rates to banks will continue to rise. Banks respond by raising their borrowing rates to consumers and businesses, resulting in higher mortgage interest rates as well as rates for credit cards and other loans. To reach the Fed’s target rate of two percent inflation, several things need to happen, for consumers to spend less, housing prices to decline and unemployment to increase. Rates are currently the highest they’ve been in over 20 years.

Borrowing rates vary according to two things: Federal Reserve overnight borrowing rates to banks based on local market conditions and the risk of foreclosures in a given area. If inflation continues to rise, the Fed has suggested it may hike rates again in September.

Mortgage interest rates

Over 40% of U.S. mortgages originated in 2020 and 2021, when mortgage rates were at record lows, which explains why homeowners are reluctant to sell their homes and take out new loans at twice the interest rate – over 7%.

To illustrate the difference, a home costing $450,000 with 20% down and at 3% in 2021 cost about $1,518 per month in principal and interest alone.  In 2023, the same home with 20% down and at 6.8% would cost you $2,347 per month – an increase of $829 in just two years.  If you carry the loan to its term – 30 years – you’ll pay a total of $546K at 3% including principal and interest, and $844K at 6.8%.

What many consumers may not realize is that published rates on mortgage rates are idealized as if the borrower has the best credit scores, a 20% down payment, and a solid work history. In reality, mortgage interest rates depend on many factors including debt-to-income ratio, the home you’re buying, your local market conditions, the terms of your loan, your lender’s underwriting practices, and more.

Supply and demand

The continuing shortage of homes for sale has multiple causes, but the most obvious reason is that the country is not building enough houses for the number of households that are forming. Between 2012 and 2022, 15.6 million households were formed, but only 8.5 million single-family homes and 3.4 million multi-family homes were completed. The gap between single-family housing starts and household formations grew from 5.5 million in 2021 to 6.5 million in 2022.

Housing is still suffering a hangover from the 2008 housing crisis, as it took years for home prices to recover from devastating 30% losses. In the meanwhile, lenders tightened lending practices to comply with stricter consumer qualification rules from Fannie Mae and Freddie Mac, government-sponsored entities tasked with buying mortgage packages from banks and putting them into securities. This replenishes money to the banks so they can lend to homebuyers.

Homebuilders are still recovering. Not only were commercial loans harder to get, but consumers weren’t buying homes while prices were falling in the decade following the housing recession. Subsequently, builders put their money toward multi-family apartment complexes or in luxury homes, leaving a serious shortage of affordable entry-level and workforce single-family homes.

During the pandemic, many workers worked from home and found they wanted a different lifestyle. They flocked from urban centers to suburbia and to small towns to find larger, more comfortable homes. Those who purchased homes at record low interest rates are finding three to four years later that their homes are worth much more money, but they’re reluctant to buy another home at today’s higher prices, coupled with interest rates that more than doubled since 2021.

From July 2021 to July 2022, there were 6.4% fewer homes listed on the market as homeowners declined to list their homes for sale. Coupled with builders pulling back on housing starts in 2023 by nearly 20%, homebuyers may face tighter inventories of homes for sale. Realtor.com anticipates that lack of inventory, plus higher mortgage rates and still-high home prices will cause the number of homes for sale to drop 5% and that housing sales will fall 15.8% to about 4.2 million homes sold this year. If that happens, it will be the lowest number of homes sold since 2012. 

For more than seven years, the Lansing real estate market has been defined by a limited supply of available homes, mortgage rates below 4%, and homes sales exceeding the asking price by thousands. In April of 2022, sellers routinely received competitive offers within a few days of market exposure. In June, mortgage rates suddenly doubled to 7.3% leaving many buyers to reconsider the purchase of a home.

The 2023 Spring homebuying season is beginning in the shadow of continuing inflation and high home prices which may be giving both buyers and sellers reason to pause. However, despite changing market conditions, it’s still a seller’s market…and mortgage rate is the only change!

• The number of buyers continues to exceed the available home for sale.
• Mortgage money is easy to obtain.
• Given the comparative cost of renting, consumers are feeling better about the housing market.
• Sellers may not receive offers exceeding the home’s fair market value.

Home sales statistics for this first quarter of 2023 are consistent with previous years in the Lansing area market. Of course, things may change, but rents have been steadily increasing, making it economically cheaper to buy than to rent.

Lansing Area Market View – April 1, 2023
  405 – currently listed homes for sale in the five county greater Lansing area.
  219 – homes with accepted offers. (Awaiting inspections and/or appraisal.)
  280 – homes listed as Pending. (Have completed inspections and will soon close.)
  1094 – homes that have closed since January 1, 2023.
  6339 – homes that have closed in the past 12 months.

Current Mortgage interest rates
  30-year fixed – 6.42% ($6.27 per $1000)
  15-year fixed – 5.68% ($8.27 per $1000)

What will the new year bring for homebuyers, homeowners and home sellers? Lower or higher home prices? Higher or lower mortgage interest rates? Or a continuation of the overheated pandemic-inspired housing market?

There’s no question that the blistering housing market of the past three years was hard on homebuyers. By October 2022, the average mortgage interest rate for a 30-year fixed is 7.24%, more than double the 3.22% level in January 2022.

According to Fannie Mae, the combination of high inflation, monetary policy tightening, and a slowing housing market is “likely to tip the economy into a modest recession in the first quarter of 2023.” However, the housing market is typically slow during the first quarter in Michigan due to cold weather.

Many economic forecasters believe housing prices will decline, but that homebuyers shouldn’t fear buying during a declining market. Morgan Stanley predicts a 7% dip in home prices for 2023 that would only return housing prices to where they were in January 2022 – 32% higher than prices were in March 2020 when the pandemic began. Economists with Goldman Sachs and Moody Analytics are predicting 5% to 10% declines in home prices, based on lack of homebuyer affordability, slowing housing sales, fewer mortgage applications and a looming recession, however mild.

BusinessInsider.com reports that the Federal Reserve’s overnight rate hikes have raised mortgage interest rates, pushing affordability to new lows, but that a recession could bring interest rates down again. That combined with softer homebuying demand due to inflation and sellers lowering their prices would make spring and summer 2023 great times to buy a home.

Lansing-East Lansing was the nation’s most affordable housing market, defined as a metro with a population of at least 500,000. Here, 84.4 percent of all new and existing homes sold in the third quarter were affordable to families earning the area’s median income of $89,500.

Top five affordable major housing markets:
1. Lansing-East Lansing, Mich.
2. Indianapolis-Carmel-Anderson, Ind.
3. Scranton-Wilkes-Barre, Pa.
4. Toledo, Ohio
5. Syracuse, N.Y.

The National Association of Home Builders has reported this week U.S. housing affordability fell to its lowest level since NAHB began tracking it on a consistent basis in 2012. They say rising mortgage rates, ongoing building material supply chain disruptions, high inflation and elevated home prices and pushed the housing market into a recession.

According to the NAHB/Wells Fargo Housing Opportunity Index, just 42.2% of new and existing homes sold between the beginning of July and end of September were affordable to families earning the U.S. median income of $90,000. This marks the second consecutive quarterly record low for housing affordability since the Great Recession.

The Lansing area housing shortage continues with higher mortgage rates having reduced the number of qualified buyers who are able to invest in a home purchase. Unlike last year’s market, when the monthly mortgage payment considerably cheaper, homes are taking longer to generate an offer. Entering the winter market, sellers listing their home above market value may have few showings.

If you’re looking to buy a home, the days of low interest mortgages below 4% have passed. Recent inflation has translated into higher interest rates with increased monthly payments. Mortgage rates have increased consistently since the start of 2022 when they were at 3.5%.
As of October 31st, the rate for a 30-year conventional mortgage has climbed to 7.08%.

Inflation, home prices and higher mortgage rates are impacting affordability. Causing many homebuyers to stop looking. Buyers who made unsuccessful offers during the Spring 2022 market may need to adjust their budget and their expectations. The table below illustrates the difference in monthly mortgage payments for a few common mortgage amounts.

Home sales in the Lansing area market remain normal for this time of year and the statistics are consistent with previous years. Of course, things may change, but rents have been steadily increasing, making it economically cheaper to buy than to rent.

Lansing Area Market View – November 1, 2022
• 717 currently listed homes for sale in the five county greater Lansing area.
• 250 homes with accepted offers. Awaiting inspections and/or appraisal.
• 302 homes listed as Pending. Have completed inspections and will soon close.
• 5684 homes that have closed since January 1, 2022.
• 7051 homes that have closed in the past 12 months.

Mortgage interest rates
30-year fixed – 7.08% ($6.71 per $1000)
15-year fixed – 6.36% ($8.63 per $1000)

Third quarter sales statistics (July – September) shows that the average sales price of Lansing area homes increased from $213,401 to $231,683 during the past twelve months. This 8.6% growth represents an average home value increase of $18,282.  (These figures include all sales throughout the Greater Lansing Association of Realtors.)

 Check out our Third Quarter 2022 Sales Statistics Link (below) for an update of sales activity by community. (Please note that pending sales, properties under contract that have not yet closed, are not factored into these statistics.)

Third Quarter 2022 Sales Statistics

Interest Rates
Throughout 2021 mortgage rates were continually between 2.8% and 3.5% making it easy for buyers to make extremely competitive offers for the few available home choices.  At the beginning of 2022, January mortgage rates for a 30-year conventional loan were at 3.55%.  However, mortgage rates on October 19, 2022, have risen to 6.93%. 

Financially, borrowing $200,000 in 2021 at 3.5% would have produced a monthly mortgage of $898. The same $200,000 mortgage at 6.93% will cost a buyer $1321.  An increase of $423 in the monthly payment. 

Selling as we enter the holiday season
Sellers who list their homes during the November and December will not likely see a large number of multiple offers with appraisal guarantees. Buyers are now being more conservative and holding back until the ‘perfect’ home becomes available. However, Holiday shoppers are likely to be serious buyers who need to move now or in early 2023.