What mortgages tell us about the current housing climate - where do we go from here?

In this article we will take a closer look at how the real estate market has been shifting buyer behavior since the end of Q1 in 2024. One of the largest categories of how shifty the market can get from month to month is through mortgages. In this article we will look at how 1-4 unit mortgages have been influencing the over-all housing market.

The Mortgage Lock-In Effect

As a result, in the recent years , since the Fed has hiked up interest rates , today mortgage rates have dramatically hiked. This has  dramatically affected the real estate market.

The recent FHFA data shows that a large portion of outstanding loans have interest rates under 4% and 5%, primarily due to the sharp decline in mortgage rates during the pandemic. This has created a "lock-in" effect, which we have also called a "mortgage jail". This is where homeowners are unwilling to liquidate their homes and buy a new one if the monthly payment goes up. Inventory of existing homes will remain low.

The average mortgage interest rate by origination value and unpaid principal balance (UPB) has increased from a low of 3.5% to 4.0%, influenced by recent purchase of loans in the 6-7% range.

Borrower credit scores remain strong, with 83.6% of borrowers having scores over 660. The percent of borrowers with scores under 600 has slightly increased from 4.8% in Q2 2021 to 7.3% in Q4 2023 but remains historically low. This is a very different scenario than what happened in 2008 with sub-prime mortgages.

Current loan-to-value (LTV) ratios are also in a healthy range, with over 69% of borrowers having LTVs under 60% and 91.2% having LTVs under 80%. This is a notable difference from the housing bubble and bust era during the GFC, when many borrowers had little to no equity. We are dealing with homeowners today that have a high degree of equity, putting them much more favorable financial position.

Inventory impacts

On a year-over-year basis, active listings have increased 25.5% and new listings have increased by 14.9%.

At first glance we would assume that this is creating a situation where demand is softening, but when you zoom back out, you will see that historically this is still extremely low.

Looking ahead to the next year, we believe we will still have a historically tight amount of supply of available homes. Today's solid lending standards and substantial homeowner equity suggest that we are unlikely to see a significant wave of single-family foreclosures in the near future. This, in turn, should help prevent the cascading price declines experienced after the last housing bubble of 2008.

We expect the lock-in effect to continue to impact housing market dynamics. As mortgage rates continue to stay elevated compared to the pandemic lows, homeowners may be less motivated to sell, keeping inventory levels tight. This could potentially lead to slower home sales and more modest price appreciation in the coming months. This impact is something that we saw in 2023 with a modest rise in home values.

Overall, while the housing market may face some challenges due to the lock-in effect and higher mortgage rates, the strong fundamentals of lending standards and homeowner equity should provide a level of stability in the face of economic uncertainty.

Much of the data above related to mortgages from FHFA was synthesized by Bill McBride of CalculatedRisk Newsletter.

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