July 28, 2019

Today’s mortgage rates are not driving the market as they have in the past


2019 NETAR President

Fannie Mae has lowered its last half of 2019 mortgage rate forecast for a 30-year fixed-rate mortgage. It dropped from 3.9 percent to 3.7 percent. At the same time, Fannie increased its expectation that home prices would grow to 5.4 percent, up from its previous forecast of 4.6 percent.

The mortgage rate information is welcomed news because it’s a signal that the rate part of real estate transactions is going to be stable for the rest of the year. However, take Fannie’s home price appreciation guess with a grain of salt if you are looking at local conditions. The last time the local single-family resale prices increased near that level was 2012 and 2013 with annual increases of 5.9 percent both years.

The local average sales price has increased every year since 2012, with one exception. In 2014 it decreased by 0.9 percent on the heels of the best two annual average price increase since 2008. In dollars and cents, it was a decline of $1,357.

During the last four years, the annual price has increased in the range of 2.3 percent to 4.2 percent. The annualized average for June’s year-to-date price points to an increase of 3.6 percent this year if current conditions continue. That would be down 0.6 percent from the 2018 increase of 4.2 percent. Even with a decline in the growth rate, it would be a new average resale price benchmark.

The current home price increase trend is a simple example of supply and demand. Consumers and investors have exhausted the surplus housing inventory that built up during the Great Recession, and the number of new homes on the market has not kept pace with demand.

Look at it this way. The existing homes segment of the local housing market recovered from the recession four years ago. It continued while many of the other local economy components continued struggling. For example, if the non-farm jobs growth rate continues at its current, it will finally reach pre-recession capacity this year. And while the new home industry has seen some encouraging growth, it’s still performing at about half of its pre-recession capacity.

Under normal market conditions, six existing single-family home sales should result in one new construction home. In the Tri-Cities market, normal conditions would have been about 5,700 new homes built in the last five years. We did not experience normal times with normal economic conditions. During this time, there were approximately 4,000 new home permits pulled.

What did increase during that period was the number of new apartment complexes, but that is another story for another time.

If Fannie’s mortgage rate projections hold a borrower with good credit and a 3 percent down payment, they would have a monthly mortgage payment of about $1,045 based on the mid-year average sales price. If he or she had bought the same house at the beginning of the year, their monthly mortgage would be about $1,112.  So, mortgage rates are not the big sales influencer they have been in the past and probably will not be for the rest of the year.

Simply put, the biggest headwind holding the local housing market back is lack of inventory. A local Realtor® who is plugged into the ebb and flow of what is on the market and what is coming on the market is the best tool to cope with this issue.

NETAR is the voice for real estate in Northeast Tennessee. It’s the largest trade association in Northeast Tennessee, Southwest Virginia region representing over 1,200 members and 100 affiliates involved in all aspects of the residential and commercial real estate industries. Pending sales, monthly Trends Reports, and the regional market analytics can be found on the NETAR websites at .