Banks are tightening their credit standards to hold more liquid assets on their balance sheets, so they may be less willing to lend out. However, credit has been tightening for over a year now as interest rates have risen, and banks also often sell their mortgages by way of Mortgage-Backed Securities (MBS), so they don’t have to hold the long-term loans on their balance sheets. If a creditworthy homebuyer qualified for a loan before the bank failures, they almost surely still qualify today. In the short term, we don’t expect major mortgage rate moves due to the Silicon Valley Bank and Signature Bank failures.
The Fed, which coincidentally met right after the bank failures, chose to raise their benchmark rate by 0.25%, rather than the anticipated 0.50%, in a continuing effort to combat inflation. The Fed chose the smaller 0.25% hike because banks were already tightening after the bank failures, so the Fed had less of a need to do so as well. Inflation is still well above the 2% target, although it’s coming down steadily. At the current rate at which inflation is dropping, it should be back to the target rate in about a year. One caveat that could slow declining inflation is OPEC’s surprise announcement that they are cutting oil production, which will cause gas prices to increase over the next few months. All this to say, interest rates will remain elevated and volatile over the next 12 months, and, more specifically, mortgage rates will likely hover around 6-7%.
The 30-year average mortgage rate has been above 6% for six months now, and a significant number of buyers are finally coming back to the market. According to the National Association of Realtors (NAR), sales jumped 14.5% in February, the largest month-over-month increase since July 2020, breaking the 12-month streak of declining sales. We attribute three main factors to the increase: (1) the initial sticker shock of higher rates has worn off, (2) the time before buyers refinance has shortened, and (3) typical seasonality has returned. As rates shot up in 2022, affordability plummeted, causing a huge number of potential buyers to get priced out of the market or, at least, reassess purchasing a home. As inflation continues to decline, the Fed has offered a clearer picture of their path. They will raise the federal funds rate through 2023 to around 5.5% and then lower rates by about 2% over the course of 2024 and 2025. Buyers, who are expecting to refinance, therefore, have more of a timeline for when they can expect lower rates. The monthly mortgage cost is reduced by 10% for every 1% decrease in the mortgage rate, so buyers can greatly reduce their monthly cost as rates fall.
The Local Lowdown
Rising demand still outpaces rising supply. Inventory in the East Bay increased in February and March, unlike the inventory in many other major markets, which is continuing to decline. Typically, inventory grows in the first half of the year, peaking in June or July. The East Bay has enough demand that many more homes could come to market before the market would balance between buyers and sellers. Currently, sales are still below last year’s level, but we expect sales to climb higher in the second quarter with more homes coming to market. As demand increases, competition among buyers and housing prices will climb with it. Home prices rose meaningfully in the first quarter of 2023, up 15.2% for single-family homes in Alameda and 8.4% in Contra Costa, although they are still nearly 20% lower than their all-time highs. If active listings unexpectedly plateau or drop in the second quarter, we could easily see single-family-home prices rise significantly.
As always, Arrive Real Estate Group remains committed to helping our clients achieve their current and future real estate goals. Our team of experienced professionals are happy to discuss the information we’ve shared in this newsletter. We welcome you to contact us with any questions about the current market or to request an evaluation of your home.
