Fierce Homebuyer Competition Despite Rising Mortgage Rates.

juliegrandon
Apr 8, 2021
4 min read

Updated: Sep 4, 2021

It may be shocking to see that the housing market is still in a highly competitive state while home prices are soaring. This would normally knock potential buyers out of the running with the rise of rates but according to CNBC this isn’t true today. In fact, the competitive market is fiercer than ever.

Nothing has changed in comparison to the rate from a year ago. However, now home prices are heightening. Compared to this time in 2020, prices are now up over 10% according to CoreLogic, and even higher in some areas. I’ve found a 27% median price increase in Alexandria, Arlington and DC And there doesn’t seem to be a break in the gains. This is the result of a record hitting decrease in supply of homes for sale.

The steep costs for land, labor and materials is a challenge homebuilders face causing them not to move forward as expected. Unfortunately due to Covid, there are also delays in bringing the materials to job sites. The number of unbuilt homes are rising and in February, single-family housing starts are lower than expected.

“There has been a 36% gain over the last 12 month of single-family homes permitted but not started as some projects have paused due to cost and availability of materials,” Robert Dietz the chief economist of the National Association of Home Builders said. “Single-family home building is forecasted to expand in 2021, but at a slower rate as housing affordability is challenged by higher mortgage rates and rising construction costs.”

The reason rates are vital to this market is because new homes come at a price premium to existing homes and higher mortgage rates are fueling the supply crunch of existing homes. Homeowners may feel discouraged due to the fact that if they choose to sell, their next home purchase would include a higher interest rate.

Although this is a challenging issue for buyers, it also demonstrates that the buyer demand hasn’t declined. Over a third of homes sold earlier this year were sold at more than their original asking price. The supply would have increased If buyers had not taken steps forward.

“This is the strongest seller’s market since at least 2006,” said Daryl Fairweather, who is Redfin chief economist. “Buyers outnumber sellers by such a huge margin that many homeowners are staying put because they know how hard it would be to find a place to move to.”

Is 3% mortgage rate the new norm?

Rising mortgage rates normally signify a recovering economy, and even with applications for mortgages dropping week-over-week, Sam Khater, Freddie Mac’s chief economist expects a 3% rate to encourage market interest for many potential buyers.

HousingWire lists several economists arguing that these rising rates are necessary for the industry to ease the increasing housing demand the market has had difficulty maintaining for months. At first, increased inventory was carrying the burden of hope. But, because of steady shortages in materials supply and lumber prices that have risen 200% since April 2020, builders’ confidence index dropped in March. Single-family housing started to decrease in February.

“The elevated price of lumber is adding approximately $24,000 to the price of a new home,” says NAHB Chairman Chuck Fowke. “Though builders continue to see strong buyer traffic, recent increases for material costs and delivery times, particularly for softwood lumber, have depressed builder sentiment this month. Policymakers must address building material supply chain issues to help the economy sustain solid growth in 2021.”

Mortgage rates are still at record low rates being 0.8 percentage points below the 2019 average. If the housing prices can’t come down in time, numerous first-time homebuyers might lose the opportunity to take out an all-time low rate. Regardless of the dangers, Fannie Mae’s conviction is that the present lightning jump wont continue further, but that rates will only move reasonably over the rest of this year.

Homebuilders Slow Production Despite Strong Demand

The U.S. Census’ latest report portrayed that new home starts from homebuilders plummeted 10.3% from January, and 9.3% from February 2020, reported by HousingWire.

Again we turn to high building material costs and low inventory to take responsibility for the problems that keep terrorizing homebuilders into the second quarter of 2021.

“Builders are slowing some production of single-family homes as lumber and other material costs, along with interest rates, continue to rise,” said chairman of the NAHB, Chuck Fowke. “Shortages of lumber and other building materials, including appliances, are putting future construction expansion at risk.”

“It’s important to keep the bigger picture in focus and not overreact to what may turn out to be a one-month blip,” according to Zillow Economist, Matthew Speakman. “The monthly decline in permits, the largest one-month decline since April, and downshift in starts can likely be attributed at least in part to the severe winter weather. And despite the monthly declines, both permits and starts are still near their highest levels in more than a decade.”

Odeta Kushi , First American Deputy Chief Economist reported a surge of 5,300 residential construction building jobs month-over-month. Kushi said, this is a signal of an extended future housing supply.

“Nothing sells like a shortage,” says Kushi. “Consider the impact of construction labor on the velocity of new home construction. The growth in residential construction jobs supports further improvement in the pace of homebuilding because building a home does not readily lend itself to outsourcing and automation. Residential construction employment is easing as a headwind to future housing starts.”

Weekly Mortgage Rate Update

Mortgage rates continue to slowly build, but remain floating around three percent, which holds interested buyers in the market. But, residential construction has noticeably dropped for two straight months and because of the extremely low inventory condition, clash and competition between prospective homebuyers is a shocking truth, particularly for first-time homebuyers.

The average rate for a 30-year fixed mortgage is 3.09%, which is down 0.56 points from this time last year according to The Freddie Mac weekly survey.