The Housing Scene by Lew Sichelman

High Prices Offset Gains From Low Rates

Housing prices are rising so fast -- “too fast,” as the chief economist at the National Association of Realtors said recently -- that they are all but obliterating any gains buyers are seeing from record-low interest rates.

Even if rates continue to fall -- and Mark Fleming, chief economist at title insurance company First American, thinks it’s possible they could dip as low as 2% -- house prices are poised to continue rising so quickly that any savings could be minimal, if not wiped out altogether.

Loan rates had remained below 3% for 12 straight weeks as of the end of October, according to mortgage investor Freddie Mac. And as the month came to a close, the average was at 2.81%, nearly 1 full percentage point lower than the same time last year.

But according to Realtor.com’s latest report, median listing prices in September were 12.9% higher than a year ago. For 21 consecutive weeks now, prices have been accelerating, says Chief Economist Danielle Hale, adding that 2020 is way beyond the ordinary.

“During a normal year,” Hale reports, “asking prices begin to dip going into the fall as the types of homes for sale shift and sellers have to do more to attract a buyer from a smaller pool of shoppers. But 2020 is not following this usual seasonal trend, and the typical September asking price remained at $350,000 -- on par with peak summer home prices.”

Brokerage chain Redfin pegs the late-September median selling price in 434 metropolitan areas at $319,769. That’s the highest median cost for homes ever, and a 14% jump from a year ago. It’s also the largest spike in median home sale price since August 2013, the company reports.

And with new listings down 7% and inventory falling by 38%, according to Realtor.com, prices are bound to rise ever higher. Indeed, Veros Real Estate Solutions, a collateral valuation service, anticipates that home-price appreciation will increase sharply during the next 12 months in the 100 most-populated markets.

A look at mortgage rates shows why homebuyers are coming out of the woodwork. In January, the average for a 30-year fixed-rate loan was 3.708%. But by September, it had slipped to 2.75%. That’s not a record low, but it’s still awfully attractive.

Now for the rudimentary math: In January, the median price of an existing house nationally was $268,600, according to NAR. And at 3.708%, the monthly cost for principal and interest was $1,238. But by September, the median had jumped to $316,200. And at 2.75%, the monthly charge was $1,291.

As a result, buyers of median-priced homes paid $53 a month more -- $636 a year -- even though rates had fallen by almost a full percentage point.

Of course, your monthly payment is based on what you borrow, not the price of the house. And the amount you borrow depends on the size of your down payment. The more you put down, the less you need to borrow and the lower your payment. The larger the down payment, the lower the monthly payment.

That said, here’s a little deeper way of looking at the math above:

According to Ellie Mae, whose loan origination technology is used by thousands of lenders, the average 30-year purchase loan amount in January, when the typical mortgage rate was 3.95%, was $262,629. The result was a payment of $1,258.

By September, the rate had fallen to 2.95%. But the average loan was for $292,475, yielding a payment of $1,234. So, because of larger loan amounts as a result of higher prices, the total savings from a full percentage point drop in rates was just $24 a month.

The savings for people who refinanced were a bit larger -- $101 a month for those who didn’t take any cash at closing and $86 for those who did -- again, because in each case, the amount financed was larger. And when all loans, including those with 15-year terms, were lumped together, the savings netted because of lower rates was just $28.

These numbers, says Ellie Mae’s Erica Bigley, are “very generalized” and do not take into account borrowers’ credit profiles or location. And none of the figures used here include mortgage insurance, property taxes and homeowner’s insurance, all of which are likely to be a tad higher because of higher house prices.

They also don’t take into account the “points” that may or may not be paid at closing by borrowers to secure a low mortgage rate. (A point is 1% of the loan amount. So if a borrower paid 1 point on a $262,000 loan, he or she would pay $2,620 in cash at settlement.)

And finally, these are median loan amounts. Borrow more than the median, and whatever savings you enjoy from lower rates are likely to be totally exhausted.

The bottom line: Lower rates have not turned out to be the blessing most people believe them to be. While they have indeed sparked demand, that demand has cut deeply into supply. And the lack of supply has driven up prices.

“If there was an oversupply of houses for sale, the impact of lower rates would be much greater,” Fleming told me. “The market always finds equilibrium.”