Today, the Federal Reserve decided to pause interest rate hikes, according to CNBC. Further, Fed Chairman Jerome Powell noted that there may be fewer rate cuts projected in 2024 due to a stronger-than-expected economy. “The change to fewer projected rate cuts in 2024 has more to do with Fed officials’ optimism about economic growth than a growing concern about stubborn inflation.”

Ahead of today’s rate decision, Jiayi Xu of Realtor.com outlined how interest rates rose slightly. Specifically, the Freddie Mac fixed rate for a 30-year mortgage increased 0.06% to 7.18% last week. Although rising energy prices influenced August’s overall inflation, the core CPI indicates that core inflation is gradually decreasing towards pre-pandemic levels.

Source: Realtor.com (September 2023)

This reality is keeping many would-be homebuyers on the sidelines, according to Dana Anderson of Redfin. The median monthly mortgage payment reached a record high of $2,632 in the four weeks ending September 10. Additionally, home prices have increased by 4% compared to the previous year. These factors, including high mortgage rates and rising home prices, have resulted in a 12% decrease in pending home sales year over year.

The Mortgage Bankers Association (MBA) reports on mortgage application volume, which fell 0.8% week-over-week. Refinances were 31% lower than the same week last year, and purchase applications were 27% lower. Joel Kan, MBA’s Vice President and Deputy Chief Economist, notes:

“Mortgage applications decreased for the seventh time in eight weeks, reaching the lowest level since 1996. Last week’s decline was driven by a 5 percent drop in refinance applications to the weakest reading since January 2023…The 30-year fixed mortgage rate increased to 7.27 percent last week and was 40 basis points higher than where it was in late July. Purchase applications increased over the week despite the increase in rates, pushed higher by a 2 percent gain in conventional loans. Given how high rates are right now, there continues to be minimal refinance activity and a reduced incentive for homeowners to sell and buy a new home at a higher rate.”

Apartment supply

Veronica Grecu of RentCafe reports on apartment supply, highlighting that it is at a record high, with 1.2 million units added to the market in the past three years. Further, 2023 is projected to be another peak year, with 460,860 rentals expected to be opened by December. The New York metro area leads the way, followed by Dallas and Austin, TX. This high number of apartment deliveries is expected to continue until 2025, when the current economic headwinds may impact construction. 

Source: RentCafe (September 2023)

Jay Lybik of CoStar Analytics (subscription required) adds to the discussion, noting that the number of new apartment units completing construction nationwide this year will be 520,000. This is the highest number since 1987.

However, demand is strong for the multifamily asset class, according to Barbara Ballinger of Globe St. Absorption reached 98,429 units in the first half of 2023, a significant increase of 83,449 units in the second quarter. This surge in absorption nearly quadruples the figures from the same period last year. This highlights the strong demand as vacancy rates still remain historically low.

Ballinger also reports on RealPage data showing markets where demand is most outstripping supply:

“At the top of this list of demand outstripping supply was Chicago-Naperville-Elgin, Ill.-Ind.-Wis., which had 2,488 completions and absorption of 4,062 units for a big difference of almost 1,600 units…Next, in second place, came Virginia Beach-Norfolk-Newport News, Va.-N.C. where only 208 units were completed but 786 were absorbed. In third place was the coastal area of San Diego-Carlsbad, Calif., where 610 units were completed and almost double that number or 1,127 were absorbed.”

Axios reports on the above RentCafe on the markets with the most influx of new supply:

Source: Axios (September 2023)

According to Diana Olick of CNBC, this influx of new supply will put downward pressure on rents. “Apartment rents have been cooling off sharply for several months, and they look like they’re about to go negative compared with a year ago. Rents in August were just 0.28% higher than August 2022…Compare that to a year ago, when rents were posting 11% annual growth.”

Distressed markets

ATTOM Data Solutions released a few reports highlighting some of the more distressed markets last week. According to the first report on August foreclosures, the nationwide foreclosure rate for housing units was 1 in every 4,113. 

The states with the highest foreclosure rates, according to ATTOM Data Solutions, were Nevada (1 in every 2,224 housing units), Illinois (1 in every 2,433 housing units), South Carolina (1 in every 2,506 housing units), New Jersey (1 in every 2,585 housing units), and Delaware (1 in every 2,618 housing units).

In a second report, ATTOM Data Solutions reports that New Jersey and Illinois have the country’s highest concentrations of at-risk markets based on home affordability and foreclosures. The biggest at-risk clusters were New York City, Chicago, and Philadelphia. ATTOM concluded that the South and Northeast are less exposed to market decreases.

Dana Anderson of Redfin reports on the vacation rental market, which may suffer some distress as demand has now dropped to a 7-year low. “Mortgage-rate locks for second homes were down 47% from pre-pandemic levels on a seasonally adjusted basis in August, compared to a 33% decline for primary homes. August marks the 14th-straight month that second-home demand has hovered at least 30% below pre-pandemic levels.”

Source: Redfin (September 2023)

“The allure of second homes has diminished as many companies–including big ones like Amazon, Apple, Disney and JPMorgan– call workers back to the office, at least part of the time…Buying a vacation home to rent it out on a short-term rental site like Airbnb may be less attractive than it once was. Local governments including New York City are instituting new short-term rental regulations, like new taxes and strict permitting, that cut into profits and make the business more difficult.”

Lily Katz, also of Redfin, reports on pending home sales and which markets are experiencing the biggest moves amidst record-high interest rates. Here are some highlights:

• In Boise, ID, pending sales fell 70.5% year over year, more than any other metro Redfin analyzed. Next came Hartford, CT (-57.3%) and New Haven, CT (-55.8%). 
• In Bridgeport, CT, closed home sales dropped 25.9% year over year, more than any other metro Redfin analyzed. Next came Stockton, CA (-25.8%) and Tacoma, WA (-25.7%). 
• Median sale prices fell in 15 metros, with the steepest declines in Austin, TX (-7%), Boise (-5.8%), and Fort Worth, TX (-2.7%).
• New listings fell most from a year earlier in Hartford (-46.7%), Allentown, PA (-46.6%), and New Haven (-38.8%).