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Home prices have been up sharply, but rising mortgage rates and low supply have been weighing on the market. What could it mean for buyers and sellers alike?
In many ways, today’s housing market is unlike any other. A strong increase in demand in the wake of the pandemic helped spark a surge in home prices, which have reached record levels and have been a boon for sellers. At the same time, a sharp decline in affordability has become a challenge for many would-be buyers and is prompting a slowdown in sales.
Is the housing market still hot? What you need to know
The Merrill Perspectives podcast
Is the housing market still hot?
What you need to know
Chief Investment Officer,
Merrill and Bank of America Private Bank
Senior U.S Economist,
BofA Global Research
Fair Lending and Strategic Relationships Executive,
Bank of America
Please see important information at the end of this program. Recorded on 5/10/2022.
Chris Hyzy: For many of us, our home is one of the biggest investments we’ll ever make. Our home represents comfort and security; where we raise our families or retire. And for a growing number of us, where we work as well. But with home prices still soaring in many parts of the country, is now still a good time to buy? And what could other big changes in the economy, including rising mortgage rates and the sharp spike in inflation, mean for buyers and sellers alike?
Hello and welcome to this edition of the Merrill Perspectives podcast. I’m Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank. Today’s program is all about the housing market. We’ll discuss the biggest shifts and trends that you need to know about, whether you’re a buyer or a seller.
We’ll consider what’s been driving home prices higher and whether they’ve peaked or could go higher still. And we’ll offer practical guidance and ideas you could consider today when buying or selling and the role that your home can play in your overall financial picture.
Joining me for this conversation are Alex Lin, senior U.S. economist for BofA Global Research.
Alex Lin: Hi, Chris. Thanks for having me.
Chris Hyzy: And Kathy Cummings, Fair Lending and Strategic Relationships executive for Bank of America.
Kathy Cummings: Hi, Chris, great to be here.
Chris Hyzy: Alex, let's start with you. A lot of big changes in the housing market since the onset of the pandemic just over two years ago. What are the biggest themes and trends you're watching today?
Alex Lin: Sure, Chris. So, the biggest theme this year to me is the record-breaking shock to affordability. Now, affordability had already started to wane over the course of last year because of hot home prices, but now there is a double whammy with interest rates surging. Just to give some numbers, 30-year mortgage rates ended last year at around 3.3%. Over the past four months or so it's risen closer to 5.5%, which is a massive move in a short amount of time. So, one of the key developments we're going to be watching out for is how do home sales and housing demand respond?
There are some positive tailwinds that are going to underpin the sales trajectory. Namely, tight labor markets and rising wage growth, healthy household balance sheets, favorable demographics, migration to lower cost areas, and even a pull forward in demand in anticipation of even worse affordability in the future. Overall, we're expecting existing home sales to pull back by at least 10% this year, maybe even 15%.
The other development that we're watching out for is the path of new construction. We are dealing with a historical supply-demand imbalance, so we do think that new construction is going to be fairly resilient with housing starts potentially seeing some growth this year.
Chris Hyzy: Okay. Alex, you've talked a lot about the affordability particularly as it relates to what's going on right now. We've got rising interest rates combined with low inventory. We also have still elevated inflation. Some would say inflation could go slightly higher from here. So what does this mean for home prices for the rest of the year and into 2023 in your opinion?
Alex Lin: That is certainly another big question for housing. Are we going to see a massive correction in home prices -- or what is the trajectory look like for there? Now, we're actually much more positive on home prices and we think that this year is actually going to be pretty strong with home prices up another 15%, followed by a cooling off to around 5% in 2023.
You know, the key driver of home prices from our perspective is the supply-demand imbalance that I kind of touched on earlier. One of our favorite metrics is to look at existing homes months’ supply, which is a measure of inventory to sales, and that has dropped to below two months earlier this year, which is a record low.
Just to give you some perspective, a normal or balanced market is when months’ supply is around five to seven months. So again, we think home prices are going to remain under pressure going forward even with demand cooling off and that means that there is room for affordability to continue to head even lower.
Chris Hyzy: Kathy, let's bring you in here. Given the backdrop that Alex just painted, what would you say are the two or three most important points for people to focus on today as they consider whether to buy or sell a home? Does a lot depend on what the market is doing or are there other considerations as well?
Kathy Cummings: Yes. Thank you, Chris. The most important step you can take if you wish to buy a home is to make sure you're financially prepared and make decisions well in advance of shopping for a new home. Even with rising interest rates and home price increases, this is still a good financial move for most. The rule of thumb, if you’re concerned about rising interest rates is that for every $100,000.00 that you borrow, a 1% interest rate increase equates to $59.41. So don’t let the headlines of rising interest rates scare you off without exploring your options.
Two, be prepared to act fast. Our Homebuyer Insights Report found that 20% of prospective homebuyers said that they would act immediately and 65% would make an offer within three days. With homes now staying on the market an average of 25 days compared to 56 days two years ago, it becomes really important to be prepared.
And three, consider what you're comfortable with sacrificing prior to looking at and in turn falling in love with a home. Our Homebuyer Insights Report found that 79% are willing to buy a home further from entertainment, restaurants and shopping, 71% are willing to buy a smaller home, and 70% are willing to forego outdoor space. Bottom line, know your priorities prior to shopping.
When it comes to selling, it's all about whether you can find that new home and we can dig into that a bit more later.
Chris Hyzy: Yeah, so speaking of digging, let's talk a little bit more about the first-time homebuyer. Are there any particular things they should be aware of? Are they at a disadvantage because they don't have a current home to sell to help pay for the new one?
Kathy Cummings: I can't emphasize this enough – know your market. Do your research. Understand what resources are available to you. You are absolutely not disadvantaged by not having a home to sell. It’s quite the opposite in this market. In today’s housing market, having a home to sell or having that contingency or a mortgage contingency in your contract makes the offer less enticing to the seller.
When considering if you should put off buying a home, consider the rent increases that are occurring in your market and weigh your options. My son’s rent went up $300.00 this year, so he’s starting to get serious about buying a home.
Chris Hyzy: So Alex, on that note, let's take a trip around the United States. Are there particular regions of the country that could offer better value than others? And conversely, are there areas that look particularly overheated at this time?
Alex Lin: That's a great question. I've been speaking broadly about the housing market, but the truth of the matter is that housing is very much a local story. Housing conditions are going to look a lot different depending on where you're looking, whether you’re moving from state to state, city to city, or city to suburbs or to more rural areas of the country.
On one end of the spectrum, you have some crazy, expensive markets like San Jose, San Francisco, Los Angeles and San Diego, or in other words, a lot of the coastal cities in California where the typical mortgage payment is more than 40% of your income.
I would also note that in these cities, mortgage payments also exceed your typical rents as well, which is not the case nationally. Actually, on the aggregate, mortgage payments are around 70 cents on the dollar compared to rents which makes sense, right? Cause otherwise, why would anyone ever buy?
Now, we are seeing a lot of migration towards the south and cheaper states in the west. Places like Florida, Texas, Idaho, Montana and Arizona, which offer cheaper alternatives. In many cities in these states like Phoenix, Austin, Jacksonville, the mortgage payment is like 20% to 30% of income, which is clearly much more affordable.
Chris Hyzy: So Kathy, speaking of moving and migrating, for those in the planning stages of home buying right now, what steps should they be taking and also for those considering selling, what should they be keeping in mind?
Kathy Cummings: Prior to shopping for your new home, you should do the following. First of all, get your financial house in order. Try to make sure your credit score is as high as possible to reduce the cost of the mortgage payment. The higher your credit score, the lower the mortgage payment. A HUD approved housing counseling agency can help if you don't know where to start or need some additional assistance.
Also, you want to perform that rent versus own analysis. As Alex said, there's so much variety or variability between markets, so making sure that you understand where you sit on that rent versus own analysis using an online tool that can assist you in making the right decision for your personal situation and the market that you live in.
If you need funds in order to afford the down payment and closing costs, see what programs are available in your market.
Get pre-approved. I can't emphasize that enough and most realtors won't even show you a property unless you're pre-approved. At a very minimum, pre-qualified. But get pre-approved by working with a lending officer which includes a full credit underwrite.
And then of course study your market and narrow down where you want to purchase and what features you're willing to sacrifice. Identify the must haves and the nice to haves.
Now, if you're thinking of selling, if you want to position yourself for the highest selling price possible, make sure you take care of any of the home repairs prior to showing your home. Even minor items can make a buyer question what issues the home may have that they can't see.
Check your curb appeal. Make sure you clean out any dead plants, lay down fresh mulch. Keep your lawn well maintained.
And then of course understand your market and be reasonable. If you're selling your home with dated features - so let's give an example here. If you have a similar home with the same square footage, bedrooms, bathroom counts, etc., right next door but their house is brick and yours is stucco, understand that the brick home will typically sell for more. And if they recently had a major kitchen or bath renovation, again it will likely go for more money.
Chris Hyzy: So Kathy, I think you purchased your first home back in 1986 when interest rates were a lot higher than here, somewhere around 18%. What are some of the most important lessons you learned about being a homeowner and seller over these past few decades?
Kathy Cummings: That's a great question. My most recent home purchase was in 2019 and I'm on my 10th home and I'm still learning. So, understand that your lender is going to get in all of your business to ensure that you are in a position for successful homeownership.
Since the housing crisis, lenders are required to determine if you have the ability to repay, meaning they need to check every square inch of your finances. Also, lenders are required to provide you with a lending estimate, known as an LE, and you should use this to shop and make sure that you're getting a fair interest rate for your individual situation.
Do not put yourself in a situation where you’re house poor. When mapping out your financial plan, make sure you include other financial goals such as saving, investing, growing family, college, etc. in your budget and determine what you can comfortably afford. The guardrail is 30% of your total gross income for housing expenses, which should include utilities as well.
You'll need to also prepare and budget and maintain an emergency fund to cover unpredictable home repairs. You will typically have to purchase a refrigerator, washer and dryer, lawnmower, etc. when you first move into your home, so be sure to budget for those expenses as well as actual moving costs for the truck and movers.
I helped my daughter purchased her first home in Brooklyn several years ago and she said buying a home is overwhelming and scary. I told her that's a healthy fear and the way to combat that fear is by doing your research and leveraging a team of trusted advisors to help set you up for success.
Chris Hyzy: Let's dig just a little bit deeper into some of the areas that homeowners should be thinking about in terms of their overall financial picture. Rates are up considerably off of record lows, certainly much lower than 20 years ago or so. But where does the equity or debt on people’s homes fit into their equation?
Kathy Cummings: Yeah. Excellent question. I'm a huge believer in continued savings patterns after home purchase and making sure that you can have a great quality of life after the purchase. As I mentioned earlier, mapping out all of your financial goals, not just your home purchase in your new budget, is critical in creating that peace of mind. Do you have a car that you're going to need to replace in a few years, aging parents who will need some assistance, or the desire to start a family? Life is unpredictable and you want to be prepared.
So, when it comes to your retirement, if you build up home equity over 20, 30 years or however long you have left to retirement, that is a great resource to be able to leverage in your retirement years.
Chris Hyzy: Alex, Kathy just talked about unpredictability. She talked about obviously, the longer term. What are some of those longer-term trends you see shaping the housing market?
Alex Lin: Demographics are actually quite favorable over the next few years. The median age of the first-time homebuyer is 33 years old and this is likely to be particularly supportive of demand for single family homes and also a shift from urban centers to the surrounding suburbs as millennials start families.
Migration is also going to be another key longer run driver to pay attention to. In the U.S. we’ve been seeing general migration away from the northern cities and states towards the south and west, what has been known as the Sunbelt migration.
Better weather has been a factor for sure, but the other important variable is cost. And California is a great example of this. In the last decade we've seen net migration turn from positive to negative as California has just gotten really expensive. Meanwhile, states like Florida and Texas, which also have low income taxes, have seen a ton of migration.
Now, many of these flows likely reflect retirees, right? We have the Baby Boomers who are now in the retirement age and they want that better weather and lower cost of living. That said, many of these areas in the south are booming with strong economic and population growth, so it isn't just retirees.
Moreover, one of the big shifts and changes in the pandemic has been the increase in remote working or hybrid work capabilities, which also helps foster migration as well as a desire for increased living space.
Chris Hyzy: So Alex, let's expand a little bit on the hybrid or remote work type of trend. As it relates to rent overall versus own, does that equation become even more important in a hybrid type of environment that gets extended out over these next few years? Is it still that important, the cost of rent relative to the decision to own in your opinion?
Alex Lin: We’ve been talking a lot about the fact that housing affordability has been declining because we've been seeing an increase in housing demand. We've also been seeing an increase in rental demand as well, so we have been seeing very strong rent inflation. And I think it does go back to your point, the shift that we've been seeing in terms of migration, in terms of remote work and hybrid work capabilities, that has helped facilitate just generally stronger housing demand in general both in the ownership market as well as the renter market.
Now the question of whether, “Is it better to rent or own?” You do have to know your market. In some markets it's going to make more sense to buy your own home. In other markets it's going to make a lot more sense to actually rent.
Chris Hyzy: Absolutely fascinating and a topic I'm sure that will continue to bubble up as we move through this next cycle. So, Kathy, final question for you. What are some of the tools and resources that Bank of America offers that could help someone in their journey in buying and/or selling a home?
Kathy Cummings: Bank of America has a $15 billion community homeownership commitment designed to provide up to $17,500.00 in down payment and closing cost assistance. We have our tools accessible via a single website which is bankofamerica.com/mortgage/first-time-home-buyer, with hyphens in between.
My favorite shopping tool is our real estate center - and that's at bankofamerica.com/realestatecenter - where you can shop for a home and properties that are eligible for our grant programs are tagged.
Our grants are available to those earning less than 80% of the area median income or if you purchase in a low- or moderate-income census tract, you can earn up to 150% AMI.
Our closing cost assistance grant of $7,500.00 is available in the entire Bank of America footprint and the down payment grant, which is up to $10,000.00 or 3% of the purchase price is available in 69 markets. So perhaps you don't fit those criteria, but if you have kids who are looking or family members, be sure to have them check it out.
Chris Hyzy: That’s a really good note to end on. Alex and Kathy, thank you both for joining me for this conversation.
And thank you all for turning in to this edition of the Merrill Perspectives podcast. My guests have been Alex Lin, senior U.S. economist for BofA Global Research; and Kathy Cummings, Fair Lending and Strategic Relationships executive for Bank of America.
I'm Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank.
To learn more about our latest insights on the markets, please visit ml.com and you can sign up for Merrill Perspectives wherever you get your podcasts.
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This podcast was recorded on May 10, 2022.
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In this episode of the Merrill Perspectives podcast, hosted by Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank, our experts unpack the state of today’s housing market, including what’s driving the rapid rise in home prices and where they could head from here. They look at how important trends, including the sharp rise in mortgage rates, the population boom in lower-cost areas of the country, rising rents and the work-from-anywhere movement are affecting the outlook. And they offer a range of practical ideas and steps you could consider today if you’re thinking of buying or selling a home.
Joining Chris in this conversation are Alex Lin, senior U.S. economist for BofA Global Research, and Kathy Cummings, Fair Lending and Strategic Relationships executive for Bank of America.
For more information, read the May 2022 Bank of America Institute report on the housing market Is this time different and explore Bank of America’s 2022 Homebuyer Insights Report. And also check out the Bank of America Real Estate Center and Bank of America’s First-time Homebuyers site, which includes a range of helpful tools and resources.
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