Real estate lending is now in record territory, in large measure because of lagging mortgage rates. According to the Mortgage Bankers Association the average purchase mortgage is now $318,200, the highest level on record since the Association began tracking such data in 1990.
The MBA data is important because it demonstrates the widespread willingness of American home buyers to purchase properties at today’s prices. Not only are real estate values widely accepted they are also widely affordable otherwise borrowers would not qualify for almost $320,000 in financing.
According to the National Association of Realtors the typical existing home sold for $228,400 in February, up 7.7 percent from a year earlier. February’s price increase, said NAR, “marks the 60th consecutive month of year-over-year gains.”
If existing homes are selling for $228,400 and the typical purchase mortgage is $318,200 then we can expect that the price of new homes is substantially higher than the value for existing properties. And, sure enough, that’s the case. Figures from the Census Bureau tell us that in February the average price for a new property was $390,400 – significantly more than we would expect to pay for an existing home.
What these numbers tell us is that by and large the real estate marketplace is doing well. Prices are up significantly from the past few years, sales are good, and affordability is not a major hurdle at this time.
The housing sector represents an estimated 15.6 percent of the gross domestic product. If we are ever going to fully recover from the mortgage meltdown of 2008 then it will be necessary to continue our current path. The good news is that mortgage rates continue to be in the dumper, something which is true even though rates at this time are higher than they were a year ago.
Freddie Mac reports 30-year, fixed-rate, prime financing was available last week at 4.1 percent. This compares with 3.59 percent a year ago.
There’s no doubt that rates are up during the past year but it’s equally true that 3.59 percent is pretty close to the record low in the United States, just 3.31 percent in 2012. For all of the complaining and gnashing of teeth the reality is that mortgage rates today continue to be remarkably low.
The big question is what will happen to rates during the coming few months, especially in the crucial summer selling season. Will the Fed continued to raise bank rates and if it does will the mortgage marketplace follow suit? It’s important to remember that when the Fed raised bank rates in December 2015 mortgage rates – which are independent of the Fed — actually fell for the next six months.
However, the Fed has within its power the ability to screw up the economy and to pick winners and losers. If it continues with a series of rate hikes then all bets are off because although an increase in bank rates is surely good for the banks it’s effectively a tax on the entire economy, a higher cost of doing business. If you want to watch corporate profits fall, the federal debt soar, and unemployment rise just keep raising interest rates.
(Photo courtesy Rabat Medina Rabat Morocco)