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Is The Real Estate Market Slowing Down Due To Mortgage Rates?

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Key Takeaways

  • Mortgage rates have nearly tripled since this time a year ago.
  • However, housing prices have continued to rise, making new mortgages unaffordable.
  • Overall, the result is a 41% decline in new loan applications year-over-year.

Over the past year, rising inflation and the Fed boosting interest rates in response have caused turmoil in the housing market. Little more than a year ago, mortgage rates were near record lows. Now, they are around 7%, two to three times higher.

While some markets have seen housing prices fall in response, in most cases, the drop hasn’t been sufficient to keep mortgage payments for new purchases similar. All of this has resulted in higher housing costs for buyers.

We’ll cover what you need to know about mortgage trends for the month and where things might go in the next year.

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Background

The COVID-19 pandemic shocked the economy as millions lost their jobs and activity quickly ground down to a halt. The government responded with a combination of stimulus payments and lowered interest rates.

During the pandemic, mortgage rates hit all-time lows, reaching 2.65% in January 2021.

As the country exited the COVID recession and pandemic restrictions eased, inflation began to rise due to factors such as a tight labor market and supply chain issues. Inflation peaked in June 2022 at 9.1%.

In response, the Federal Reserve has boosted its benchmark interest rate to 3.75% to 4% from 0% earlier this year. This has caused mortgage rates to spike.

Mortgage Demand

As interest rates rise, monthly loan payments become more expensive and less affordable without a commensurate drop in housing prices, which has not materialized in many markets.

Mortgage demand has declined in 2022. Applications for new loans have dropped by roughly 41% since one year ago, and refinancing applications are down more than 86%.

December appears to show a continuation of that trend. The last week of November saw a 0.8% reduction in mortgage applications compared to the week prior. December is traditionally a slow month for home sales, exacerbating the issue most likely.

Rates

Outside of economic uncertainty and concerns about an oncoming recession, the massive increase in mortgage rates is one of the top reasons mortgage demand has dropped.

Interest rates reached a low of 2.65% in early 2021 and remained relatively low for an extended period, hovering between 2.75% and 3.25% for about a year.

As inflation rose, the Federal Reserve responded by raising its benchmark rates, which increased home loan rates. For the week of December 1st, the average rate on a 30-year fixed-rate mortgage in the U.S. was 6.49%.

This is far below historic highs, which reached over 18% back in the early 1980s. However, the last time rates exceeded 6% was in 2008, meaning these rates have not been seen for almost 15 years.

The impact that rate increases have on housing prices is immense.

Imagine you have a thirty-year mortgage with a balance of $250,000. At an interest rate of 2.5%, you’d pay $988 each month for a total of $355,680. Overall, you’d pay over $105,000 in interest.

At an interest rate of 7.5%, your monthly payment balloons to $1,748. That means a total loan payment of $629,280 that includes more than $375,000 in interest over the life of the loan.

Today, families need to afford a monthly payment roughly double what they needed a year ago to afford a home of the same price.

Home Prices

In general, as interest rates rise, house prices tend to fall. This can soften the blow of higher rates forcing higher loan payments on new buyers.

Unfortunately, price reductions have yet to materialize for homebuyers as home prices have risen through 2022.

In the first quarter of 2022, the average home sold for $514,100. In Q3, the average home sold for $542,900. This roughly 5% increase is less than inflation, meaning housing got slightly cheaper.

However, many people have not seen wage increases in line with inflation, meaning affordability has not improved.

Renters are also feeling the burden, with rents up 7.8% year-over-year. This means that everyone who still needs to get their rate locked in is dealing with less affordable housing than a year ago.

Is it a good time to buy or sell?

If you own a home and want to sell it or you are looking to buy a home, you might wonder whether now is the right time. The answer is that nobody really knows.

The Federal Reserve has boosted interest rates in response to rising inflation. The Fed may continue on this path by pushing rates even higher, or it may ease off the accelerator if inflation starts to fall.

It’s also uncertain whether housing prices can continue to increase at their current clip. Many major banks and real estate firms are predicting falling prices over the next year. The decline in mortgage applications indicates less demand, which may force price reductions.

If you’re trying to buy, you’re gambling that the Fed will stop boosting rates or that reduced demand from buyers will force motivated sellers to slash home prices.

However, if you’re on the other side of the equation, you’re likely hoping the Fed will stop increasing interest rates, making the mortgage payments on more expensive homes more affordable.

You also have to hope that fears of a recession don’t become true, leading to fewer potential buyers for your home.

Bottom Line

Buying a home is an essential part of the American Dream. Understandably, it feels out of reach for many of us right now. Recent increases in interest rates, with little change in housing prices, have put this out of reach for man. The fall in mortgage applications illustrates that.

For investors, tracking the real estate market is essential. Even if you’re not looking to buy a house, a weakening real estate market can give you an excellent opportunity to purchase land-focused investments at a discount.

If you are trying to buy a house, you need to monitor home affordability and keep your other investments liquid enough to make a down payment on short notice.

Q.ai takes the guesswork out of investing, while keeping your assets relatively liquid. Until you’re ready to make your purchase, our artificial intelligence will scour the markets for the best investments for all manner of risk tolerances and economic situations. We also diversify your investments by bundling them up in Investment Kits that make investing both simple and strategic.

Best of all, you can activate Portfolio Protection at any time to protect your gains and reduce your losses, no matter what industry you invest in.

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Irish Real Estate Returns Drop Amid Higher Interest Rates – Bloomberg

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Irish Real Estate Returns Drop Amid Higher Interest Rates  Bloomberg

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Bank of Canada comments offer light at the end of the tunnel for real estate, mortgage markets, experts say

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Canada’s struggling real estate sector is breathing a sigh of relief, but it wasn’t so much the size of the Bank of Canada’s Jan. 25 rate hike as the language that came with it that was cause for optimism.  

That’s because while the central bank boosted its benchmark overnight interest rate by 0.25 basis points to 4.5 per cent, its eighth consecutive increase, it also signalled it would put the hiking cycle on pause — at least for now.  

“A 25-basis-point increase or no increase was what we needed, along with the kind of language … that indicated we were essentially where we needed to be” Royal LePage CEO Phil Soper said in an interview. “What’s important at this stage is that we’ve clearly come to a point where interest rates aren’t going to be in the news.” 

Soper said the realization that rate hikes will be stopping or slowing should draw what he called the “missing transactions” — those with the capacity to buy but who have remained on the sidelines — back into the market, though it may take some time. 

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Those buyers, he said, have been reluctant because they understand the link between rising rates and prices, and “they don’t want to buy a house today that will be worth less tomorrow.” 

Having some price certainty will make it easier for them to enter the market, but they’ll still need to be comfortable knowing they are paying five or six per cent on their mortgages while others are locked in at two per cent.  

“There’s still many, many people out there with two per cent mortgage rates. Your sister or your cousin might have a two per cent mortgage rate but you’re going to have to pay five,” Soper said. “This will harm consumer confidence until the market has more time to adjust to it.” 

As a result, he said he saw a “muted recovery” in the cards for the spring. 

The pause also signals a light at the end of the tunnel for variable-rate holders, according to James Laird, Co-CEO of Ratehub.ca and president of mortgage lender CanWise, even if it means another dose of short-term pain. 

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Clearview Commercial Realty’s investment funds help expand portfolio

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After 22 years in the Calgary office of a global commercial real estate firm, Steve Vesuwalla started his own company, Clearview Commercial Realty, in 2019. A year ago, he established Clearview Industrial Fund, with all capital raised though Alberta investors.

Its success has been remarkable, with the closing of the first three funds that brought Clearview a portfolio of 300,000 square feet, comprising a 260,000-square-foot building anchored by the north campus of CDI College and a 35,000-square-foot industrial building in South Foothills

The third fund launched in 2022 resulted in a residential project in partnership with NAI Advent.

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Mission 19 is a luxury 67-unit apartment block that will welcome tenants this fall, designed by Gravity Architect and being built by Triumph Construction in the trendy Mission District at 320 19th Avenue S.W.

Last month, Vesuwalla embarked on a fourth — the Clearview Alberta Opportunity Fund — with a goal of raising a pool of equity that will allow his company to act quickly when commercial real estate opportunities arise.

“Successful real estate ventures result from being able to find appropriate investments and having the ability to purchase right away,” says Vesuwalla. “And cash is still king.”

Acumen Capital Partners handled the equity raise and the first round of financing closed last month. A second round is scheduled to close at the end of this month.

The first purchase — in cash — by the new fund is the former Economy Glass building at the corner of 17th Avenue and Centre Street S.W. in the Beltline district.

The 11,500-square-foot building on a .33-acre site has drive-in overhead/roll-up doors, existing office and retail showroom improvements, and highly usable and accessible lower level space.

Vesuwalla is working with a restaurant group and fitness operator to take over the spaces, but the location is ideal for future development as a multi-storey commercial-residential building. That will be planned on the completion of the extension of 17th Avenue across Macleod Trail, giving direct pedestrian and vehicular link access into the Stampede grounds, the BMO Convention Centre expansion and the Victoria Park/Stampede LRT station redevelopment.

No doubt that connectivity will invite further commercial, retail and entertainment-oriented development along 17th Avenue and in the immediate area.

Doug Johannson, executive vice-president at Clearview who joined the company in 2021, has also been busy completing some commercial real estate deals.

Explosive growth in development of commercial real estate in the Balzac area has continued with the sale of 33.85 acres on the south side of Highway 566.

Located between the successful developments of High Plains and Wagon Wheel industrial parks, it was sold by Johannson on behalf of the Abbotsford, B.C., owner to a local developer for $8.8 million.

He was also the broker for the sale of a 17-acre parcel in Frontier Park to Remington Development, and has an unconditional contract to close on the sale of a 43,500-square-foot building on Enterprise Way, between Stoney Trail and the eastern city limits.

Last year was a good one for Clearview and it has started 2023 full of confidence for even better results from commercial real estate transactions, as well as opportunities the new fund will bring.

Vesuwalla and Johannson continue to look for interesting value-added opportunities to increase Clearview’s rewarding portfolio.

Notes:

President and CEO of Bow Valley College, Dr. Misheck Mwaba, has been appointed to the board of the Calgary Chamber of Commerce for a three-year term. “I look forward to working closely with the board on strategic initiatives to address the evolving needs of the Calgary business community,” says Mwaba. “I am acutely aware of the urgent need to develop and retain a world-class talented workforce, nurture a diversified economy and grow our digital ecosystem. Mwaba is a champion of Workforce Integrated Learning (WIL), re-skilling and up-skilling, and takes pride in liaising with Calgary businesses to understand their labour demands.

David Parker appears regularly in the Herald. Read online at calgaryherald.com/business. He can be reached at 403-830-4622 or by email at info@davidparker.ca.

 

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