Housing & Mortgage
Winter Home Sales, Typically a Lull, Could Outperform
Monthly payment on a $500,000 loan: $2,049, 16% lower than 2018
Extremely low borrowing costs pushed up house prices in 2020 and could bolster them this winter when prices normally sag.
The average rate on a 30-year fixed rate mortgage is 2.7%, near record lows, according to Freddie Mac. As a result, the monthly interest and principal payment on a $100,000 mortgage is just $410. A $500,000 mortgage has a monthly payment of just $2,049; a $1 million mortgage, $4,098.
That’s unlikely to change soon as the economy struggles to come out of a nasty recession. The Federal Reserve in early November kept a key interest rate near zero and signaled it won’t raise rates even when pandemic-induced unemployment eases.
The low rates are making houses more affordable despite rising prices. John Wake, a Phoenix-based housing analyst, adjusted the Case Shiller home price index to measure the effects of inflations and lower mortgage rates. The object was to determine how much monthly payments have changed on an inflation-adjusted basis.
Wake found that the average monthly house payment in the U.S. had fallen 16% since late 2018 on an inflation-adjusted basis because of tumbling mortgage rates. It doesn’t stop there. Inflation-adjusted monthly house payments have declined 39% since the housing market peaked in 2006, before the bust.
Even in hot markets like Portland, Oregon, low rates are helping keep homes relatively affordable, even if the sale price seems outrageous. Inflation-adjusted monthly payments there are down 15% since late 2018 and 28% since the local market peaked in 2007.
“The lower interest rates are what is driving the market. It has a huge impact on the monthly payment,” Wake says. “The actual cash price is going up, but they’re being overwhelmed by the lower rate so that the monthly mortgage payment is going down.”
The combination of low rates, a tight housing market and pent-up demand from the coronavirus shutdown this spring juiced sales in the summer and fall. If the buying wave continues, the result would be a more robust winter market with less discounting than normal for that time of year.
That’s good news for thousands of American homeowners who need to sell their home in the winter and can’t wait a few months for the weather and the housing market to warm up. Maybe they need to move for another job. Or they’ve lost their job. Or they’re getting divorced. Zillow studied the housing market for a year, and found almost a fifth of the homes were sold in the winter.
In a typical year, home sales — and prices — climb from January through July or August. In 2019, the number of homes sold rose 87% from January to August, according to the National Association of Realtors. The median existing home price climbed 12% to $278,800 during that time.
The market started on its usual trajectory early this year. Then the pandemic hit, sapping home sales in April and May. The sudden economic contraction from the pandemic didn’t drag down home prices. They kept rising because housing was in such short supply and rates were tumbling.
The way the economy shrank during the pandemic also contributed to the housing market’s resilience. Some of the heaviest layoffs were among retail workers, restaurant workers, hotel workers — groups that don’t tend to be home buyers, says Gay Cororaton, an economist with the National Association of Realtors.
“These are the groups at the lowest rung of the wage ladder,” she said. “They tend to be renters.”
Meanwhile, the white collar workers who do tend to own homes were less affected. Many kept working from home. Homes sales came back to life in the summer. There is currently less than a three-month supply of homes on the market, close to a record low.
In September, sales of existing homes hit a seasonally adjusted selling rate of 6.54 million homes, up 9.4% from August and nearly 21% from a year earlier, the National Association of Realtors reported. The median price of $311,800 was up almost 15% from a year earlier.
The market doesn’t show any signs of cooling yet. Mortgage applications to buy a home have been running around 20% above the year-ago level, according to the Mortgage Bankers Association. “It looks like a good part of the activity that would have happened earlier in the year has been shifted to the fall,” says Michael Fratantoni, chief economist for the Mortgage Bankers Association.
Cororaton, the National Association of Realtors economist, expects the housing market to cool this winter — just not as much as usual.
Fratantoni sees it differently. He expects the market to slow sharply in December and January, but then get off to a faster than normal start in February and March.
Bottom line: Even if the home market slows around the holidays, sellers have the wind at their back because of the low mortgage rates and the tight housing supply. Neither factor is likely to change anytime soon.