Your Home Equity Can Offset Affordability Challenges

 Are you thinking about selling your house? If so, today’s mortgage rates may be making you wonder if that’s the right decision. Some homeowners are reluctant to sell and take on a higher mortgage rate on their next home. If you’re worried about this too, know that even though rates are high right now, so is home equity. Here’s what you need to know.

Bankrate explains exactly what equity is and how it grows:

“Home equity is the portion of your home that you’ve paid off and own outright. It’s the difference between what the home is worth and how much is still owed on your mortgage. As your home’s value increases over the long term and you pay down the principal on the mortgage, your equity stake grows.”

In other words, equity is how much your home is worth now, minus what you still owe on your home loan.

How Much Equity Do Homeowners Have Now?

Recently, your equity has been growing faster than you might think. To help contextualize just how much the average homeowner has, CoreLogic says:

“. . . the average U.S. homeowner now has about $290,000 in equity.”

That’s because, over the past few years, home prices went up significantly – and those rising prices helped your equity to accumulate faster than usual. While the market has started to normalize, there are still more people wanting to buy homes than there are homes available for sale. This high demand is causing home prices to go up again.

According to the Federal Housing Finance Agency (FHFA), the Census, and ATTOM, a property data provider, nearly two-thirds (68.7%) of homeowners have either fully paid off their mortgages or have at least 50% equity (see chart below):

That means nearly 70% of homeowners have a tremendous amount of equity right now.

How Equity Helps with Your Affordability Concerns

With today’s affordability challenges, your equity can make a big difference when you decide to move. After you sell your house, you can use the equity you’ve built up in your home to help you buy your next one. Here’s how:

• Be an all-cash buyer: If you’ve been living in your current home for a long time, you might have enough equity to buy a new house without having to take out a loan. If that’s the case, you won’t need to borrow any money or worry about mortgage rates. The National Association of Realtors (NAR) states:

“These all-cash home buyers are happily avoiding the higher mortgage interest rates . . .”

• Make a larger down payment: Your equity could be used toward your next down payment. It might even be enough to let you put a larger amount down, so you won’t have to borrow as much money so today’s rates become less of a sticking point. Experian explains:

“Increasing your down payment lowers your principal loan amount and, consequently, your loan-to-value ratio, which could lead to a lower interest rate offer from your lender.”

Bottom Line

If you're thinking about moving, the equity you've built up can make a big difference, especially today. To find out how much equity you've got in your current house and how you can use it for your next home, get in touch with a trusted real agent.

Get Ready for Smaller, More Affordable Homes

 

Have you been trying to buy a home, but higher mortgage rates and home prices are limiting your options? If so, here’s some good news – based on what Ali Wolf, Chief Economist at Zonda, has to say – smaller, more affordable homes are on the way:

“Buyers should expect that over the next 12 to 24 months there will be a notable increase in the number of entry-level homes available.”

In some ways, smaller homes are already here. When the pandemic hit, the meaning of home changed. People needed the space their home provided not only as a place to live, but as a place to work, go to school, exercise, and more. Those who had that space were more likely to keep it. And those that didn’t were in a position where they were trying to sell their smaller house to move up to a larger one. That meant the homes coming to the market during the pandemic were smaller than those on the market before the pandemic – and that trend continues today (see graph below):This graph also shows how the size of homes on the market changes seasonally. Larger homes tend to come on the market during the summer months when households with children who are out of school are looking to move.

That seasonality means, based on historical trends and the fact that fall is now approaching, we can expect smaller, more affordable homes to come to the market throughout the rest of the year.

That’s great news because, as Robert Dietz, Chief Economist at the National Association of Home Builders (NAHB), states, the need for these types of homes has gone up recently:

“. . . as interest rates increased in 2022, and housing affordability worsened, the demand for home size has trended lower.”

What Does This Mean for You?

The seasonal trend of smaller homes coming to the market in the later months of the year, coupled with builders bringing smaller, more affordable newly built homes to the market right now, is good news – especially if you’re finding it difficult to afford a home. Mikaela Arroyo, Director of the New Home Trends Institute at John Burns Real Estate Consulting, says this about a potential increase in the availability of smaller homes:

“It’s not solving the affordability crisis, but it is creating opportunities for people to be able to afford an entry-level home in an area.”

Bottom Line

 If a smaller, more affordable home sounds appealing to you, good news – they’re coming. To keep up with what’s available in your area, connect with a local real estate agent.

Why Is Housing Inventory So Low?

 

One question that’s top of mind if you’re thinking about making a move today is: Why is it so hard to find a house to buy? And while it may be tempting to wait it out until you have more options, that’s probably not the best strategy. Here’s why.

There aren’t enough homes available for sale, but that shortage isn’t just a today problem. It’s been a challenge for years. Let’s take a look at some of the long-term and short-term factors that have contributed to this limited supply.

Underbuilding Is a Long-Standing Problem

One of the big reasons inventory is low is because builders haven’t been building enough homes in recent years. The graph below shows new construction for single-family homes over the past five decades, including the long-term average for housing units completed:

For 14 straight years, builders didn’t construct enough homes to meet the historical average (shown in red). That underbuilding created a significant inventory deficit. And while new home construction is back on track and meeting the historical average right now, the long-term inventory problem isn’t going to be solved overnight. 

Today’s Mortgage Rates Create a Lock-In Effect

There are also a few factors at play in today’s market adding to the inventory challenge. The first is the mortgage rate lock-in effect. Basically, some homeowners are reluctant to sell because of where mortgage rates are right now. They don’t want to move and take on a rate that’s higher than the one they have on their current home. The chart below helps illustrate just how many homeowners may find themselves in this situation:

Those homeowners need to remember their needs may matter just as much as the financial aspects of their move.

Misinformation in the Media Is Creating Unnecessary Fear

Another thing that’s limiting inventory right now is the fear that’s been created by the media. You’ve likely seen the negative headlines calling for a housing crash, or the ones saying home prices would fall by 20%. While neither of those things happened, the stories may have dinged your confidence enough for you to think it’s better to hold off and wait for things to calm down. As Jason Lewris, Co-Founder and Chief Data Officer at Parcl, says:

“In the absence of trustworthy, up-to-date information, real estate decisions are increasingly being driven by fear, uncertainty, and doubt.”

That’s further limiting inventory because people who would make a move otherwise now feel hesitant to do so. But the market isn’t doom and gloom, even if the headlines are. An agent can help you separate fact from fiction. 

How This Impacts You

If you’re wondering how today’s low inventory affects you, it depends on if you’re selling or buying a home, or both.

• For buyers: A limited number of homes for sale means you’ll want to seriously consider all of your options, including various areas and housing types. A skilled professional will help you explore all of what’s available and find the home that best fits your needs. They can even coach you through casting a broader net if you need to expand your search.
• For sellers: Today’s low inventory actually offers incredible benefits because your house will stand out. A real estate agent can walk you through why it’s especially worthwhile to sell with these conditions. And since many sellers are also buyers, that agent is also an essential resource to help you stay up to date on the latest homes available for sale in your area so you can find your next dream home. 

Bottom Line

The low supply of homes for sale isn’t a new challenge. There are a number of long-term and short-term factors leading to the current inventory deficit. If you’re looking to make a move, connect with a real estate agent. That way you’ll have an expert on your side to explain how this impacts you and what’s happening with housing inventory in your area.

How Inflation Affects the Housing Market

 

Have you ever wondered how inflation impacts the housing market? Believe it or not, they’re connected. Whenever there are changes to one, both are affected. Here’s a high-level overview of the connection between the two.

The Relationship Between Housing Inflation and Overall Inflation

Shelter inflation is the measure of price growth specific to housing. It comes from a survey of renters and homeowners that’s done by the Bureau of Labor Statistics (BLS). The survey asks renters how much they’re paying in rent, and homeowners how much they’d rent their homes for, if they weren’t living in them.

Much like overall inflation measures the cost of everyday items, shelter inflation measures the cost of housing. And for four consecutive months, based on that survey, shelter inflation has been coming down (see graph below):

Why does this matter? Well, shelter inflation makes up about one-third of overall inflation, as measured by the Consumer Price Index (CPI). So, when shelter inflation moves, it leads to noticeable moves in overall inflation. That means the recent dip in shelter inflation might be a sign that overall inflation could fall in the months ahead.

That moderation would be a welcome sight for the Federal Reserve (the Fed). They’ve been working to get inflation under control since early 2022. While they’ve made some headway (it peaked at 8.9% in the middle of last year), they’re still trying to get to their 2% goal (the latest report is 3.3%). 

Inflation and the Federal Funds Rate  

What’s the Fed been doing to lower inflation? They’ve been increasing the Federal Funds Rate. That interest rate influences how much it costs banks to borrow money from each other. When inflation climbed, the Fed responded by raising the Federal Funds Rate to keep the economy from overheating.

The graph below shows the relationship between the two. Each time inflation (shown in the blue line) starts to climb, the Fed raises the Federal Funds Rate (shown in the orange line) to try to get it back to their target of 2% (see below):

The circled portion of the graph shows the most recent spike in inflation, the Fed’s actions to raise the Federal Funds Rate to fight that, and the moderation of inflation that happened in response to that hike. As inflation gets closer to the Fed’s current 2% goal, they may not need to raise the Federal Funds Rate much further.

A Brighter Future for Mortgage Rates?

So, what does all of this mean for you? While the actions coming out of the Fed don’t determine mortgage rates, they do have an impact. As Mortgage Professional America (MPA) explains:

“. . . mortgage rates and inflation are connected, however indirectly. When inflation rises, mortgage rates rise to keep up with the value of the US dollar. When inflation drops, mortgage rates follow suit.”

While no one can predict the future for mortgage rates, it’s encouraging to see the signs of moderating inflation in the economy. 

Bottom Line

Whether you’re looking to buy, sell, or just stay informed about the housing market, connect with a local real estate expert who can help.