A Perspective on Mortgage Rates

April 7, 2023

It’s an old saying in the residential real estate industry and we are being reminded of it now: in home buying it’s not the cost of the home—it’s the cost of the money.

The average 30-year fixed mortgage rate as of April 7 was 7.09% — sticker shock from the 2021 average of 2.96% and unpalatable compared with the 2022 average of 5.34%, especially when factoring this in: for every 1% increase in a residential mortgage rate, it has the same effect as home prices rising by 10%. In dollar terms, that means a nice family-style home for sale in Sonoma County a year ago at $750,000 would be the equivalent price today of around $878,500. For many people, that is a deal killer.

Welcome to the Sonoma County Properties news and blog post pages of our new website! The goal here is provide insight and information for home buyers and sellers, and for others that invest in or occupy commercial property, vineyards and country properties to do what they love most about in the lands we call home.

In this post, we wanted to give readers a perspective on the most talked-about subject in our industry in the last 16 months – the rapid escalation of interest rates, and how that is impacting real estate sales in our community.

As we enter the spring selling season, there are indications that home buyers are beginning to adjust to higher – and dare we say, more normalized, residential borrowing rates. After all, the rates following the pandemic—and really, the entire decade from 2013 to 2022, were well below “average” mortgage rates. How so, you ask?

Mortgage rate trends over time (Source: Freddie Mac)

Here’s how average 30-year rates have changed from year-to-year over the past five decades.

1974 to 1983 (10 years) = 11.64%

1984 to 1993 (10 years) = 10.24%

1994 to 2003 (10 years) = 7.35%

2004 to 2013 (10 years) = 5.23%

2014 to 2021 (8 years) = 3.76%

Let’s face it, home borrowers have been spoiled during the last decade. Yet even when rates were higher, homes sold, they were financed and refinance, and homebuilders built and sold new residential communities.

The Fed Funds Rate and Mortgage Rates

As far as we know, there is no clearly defined delta between the Fed Funds Rate, or the target interest rate set by the Federal Open Market Committee (FOMC) that sets the rates that banks charge each other for intra-bank loans and related credit facilities, and retail mortgage rates. However, historically speaking, the difference ranges from around 2% to 4%. In 2000, for example, when the average 30-year fixed conforming mortgage was 8.05%, the Fed Funds Rate moved around from 5.61% in early January of that year to 6.53% in the fourth quarter. In 2004, when the new home sales market was as good as it has ever been and the average mortgage rate was 5.84%, the Fed Funds Rate floated around 1.00%.

As of this writing, the Fed Runds Rate is running between 4.75% and 5%, so with the current average mortgage rate at 7.09%, we are within that historical norm.

Fast forward to the decade from 2010 to 2020 and before the pandemic, and as the main vehicle for restarting the economy after the Great Financial Crisis, Fed Funds Rates went from the low 2%s to 1.09% in early March, 2020, just before the pandemic was declared. During that span, retail mortgage rates bounced around the low single digits, and even below 3%s. In recent years the Fed Funds Rate has hovered near zero.

Which brings is to the here and now: even if the market is slow now, and it is, there is an ongoing supply-constrained market that may actually get worse.

The reason supply in the resale market may get worse in the next few years is the number of ultra-low mortgages that were refinanced at or near the bottom in late 2021. We personally have friends with 30-year fixed mortgages at 2.65, 2.75, 2.85 and even some considerable jumbo loans in the low-3s. While these folks should pinch themselves for their good fortune and excellent timing, the vast majority of them will not sell their homes anytime soon, because they can’t – either intellectually or psychologically. Even if income is no issue, the intellectual exercise of paying twice as much for a comparable home is a high hurdle.

Where do we go from here

If we can channel our inner Yoga Berra, who famously said a lot of strange things and other oxymorons, we would write: no one knows the future – it’s too unpredictable. We won’t fill up this space with what economists and other smart people think the Fed will do with its Fed Funds Rate the remainder of 2023, and if, or when, we actually and technically enter a recession. Yet what we will declare is that the housing market will once again normalize, stabilize, with buyers and sellers coming to the proverbial closing table.

And here’s why.

Millennials are surpassing baby boomers in terms of demographic dominance, and they are in their prime for family formation and home buying. They are forming families. They are and will buy homes.

Cities are losing population for the suburbs. Whether it’s remote work or lifestyle choices, smaller cities and suburbs have grown since the onset of the pandemic. Sonoma County has been, and remains poised, to add residents from the greater Bay Area. That means our market has and will have more buyers from other counties in the region and many of them are more affluent and able to pay cash for the homes they are purchasing. Everyone loves an all-cash buyer!

Price appreciation has stalled or stopped in most of the growth markets of the last two years (Boise, Tampa, etc.), but the sky isn’t falling.

In California alone, new construction barely covers the 180,000 new units the state says are needed each year to close the demand/supply deficit. Phoenix is adding roughly 100,000 new residents a year, but not every Californian wants to move to the Arizona.

And builders can’t keep up with that demand. Besides, where we live, there’s not enough of it –land.

Since the Great Recession, there is a cumulative shortage of 1.35 million single-family homes permitted in the 35 largest U.S. housing markets. That is 2.7 years’ worth of permits at the rate of homebuilding at the end of 2021.

In closing, the spring home buying and selling season of 2023 is upon us, and whether the supply that comes to the market is limited to two of the traditional drivers of residential real estate listings – death and divorce, remains to be seen at this writing. Yet in the spirit of spring (Spring Forward!) and otherwise, because you can’t be in real estate and not be at least a little optimistic, this could be the spring of a new beginning, and yes, the first step toward a more active housing market.

Categories: Market News