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"The major fortunes in America have been made in land." - John D. Rockefeller

Market Data Update

What’s Going On?

Let’s get to it

• The Federal Reserve raised interest rates by 0.25%.

• In February, both new and previously owned home sales saw a boost of 1.1% and 14.5%, respectively, compared to the previous month.

• Mortgage applications increased by 3% from the prior week.

• According to Realtor.com, the optimal week for selling a home this year is April 16th.

• Fannie Mae predicts a decline in new housing construction this year due to banking system uncertainty.

• By offering incentives like mortgage rate buydowns and home price reductions, homebuilders like KB Home managed to decrease buyer cancellations in the first quarter of 2023.

• Rent growth is slowing down, with the smallest gain in two years.

The Breakdown

Just as suspected, the Federal Reserve has declared a 0.25% boost in interest rates this week in an effort to combat inflation and restore pricing stability. However, it's surprising how the average 30-year mortgage rate has dropped subsequent to this announcement. This is because financial institutions anticipate that this hike will be the final one for the year.

Let’s unpack this. We know from last week that the rising concerns of banking instability led to lower interest rates as financial institutions expected the Fed to pause their interest rate hikes going forward. However, the Fed’s decision to continue raising interest rates will apply more pressure on the banking sector and limit their ability to keep lending. This is called a credit crunch and it’s not good for people and businesses as they will have less access to liquidity. Alternatively, it’s very good for taming inflation. Long story short - financial institutions are predicting that the Fed will have no choice but to pause interest rate hikes soon and start cutting rates later this year given the amount of pressure they have already put on the banks. And with that rosy outlook, mortgage rates have fallen giving home buyers a sigh of relief.

Home buyers are definitely paying attention to this because we are witnessing the demand for mortgages increase for the 3^rd consecutive week. The surge in demand is due to a couple of factors. First off, mortgage rates are about half a percent lower than just a few weeks ago. Second, home prices are lower compared to last year for the first time in a decade and have fallen dramatically from their peak in June 2022. Third, the spring and summer seasons are extremely busy for the housing market as people tend to move around this time.

This brings me to a dilemma because the surge in demand is not very good for future inflation expectations. The Fed determines the inflation rate by analyzing the Consumer Price Index (CPI), which measures the average change over time in the prices paid for a specific basket of goods and services. One of the largest components of this basket is housing costs (aka “shelter”), which amounts to 34% of the inflation rate. This means that if demand continues to keep home prices propped up throughout the season, we may not see inflation cool off as much as we hoped. And what does sticky inflation signal to the Fed? Keep interest rates higher for longer.

Right now, the housing market is in a neutral state. Neither a seller’s nor a buyer’s market, but rather a “wait-and-see” market.

_{Important Note: The above passage is our commentary and opinions about the real estate market, NOT financial advice.} 

Investing Tip Of The Week:

Debunking the Credit Score Myth

Mortgage lenders use credit scores to evaluate a borrower's creditworthiness and determine the terms and interest rates for a mortgage. Credit scores range from 300 to 850, and a score of 740 or higher is typically considered "excellent." Many borrowers believe that they need to have an 850 credit score to qualify for the best mortgage terms and interest rates, but this is not the case.

While a higher credit score can help borrowers secure better loan terms, such as a lower interest rate, a score of 740 or higher is generally sufficient for obtaining the same favorable terms as someone with an 850 credit score. Lenders also consider other factors such as debt-to-income ratio, employment history, and income stability when evaluating a borrower's creditworthiness.

It's important to note that even if a borrower has an 850 credit score, they may still be denied a mortgage if they don't meet other lending criteria. For example, a borrower with a high credit score but a high debt-to-income ratio may be seen as a higher risk to lenders.

Therefore, while it's important to maintain a good credit score, borrowers should also focus on meeting other lending criteria to increase their chances of being approved for a mortgage with favorable terms. This includes paying off debt, maintaining stable employment and income, and saving for a down payment.