It's been a whirlwind over the last month in the housing market. Two weeks ago, 30-year fixed-rate mortgage rates hit 6% for the first time since 2008. Mortgage rates jumped again this week to 6.7% as the Federal Reserve remains steadfast in raising interest rates to bring down inflationary pressures.
Rising rates have had ripple effects across asset prices, and housing is the latest to feel the pressure. Here are three trends in the housing market you should pay attention to and the companies impacted.
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1. Higher interest rates will put pressure on housing affordability
According to data by Freddie Mac, 30-year fixed-rate mortgages are now over 6.7% for the first time since July 2007. Last year the average 30-year rate was around 3%.
According to Sam Khater, chief economist for Freddie Mac, the housing market faces headwinds, and higher rates strain home affordability. Housing affordability is partly a result of elevated real estate prices, which boomed during the ultra-low interest rates environment amid the pandemic.
While rates have increased, home prices haven't come down nearly enough to make up for the difference. To illustrate, a $400,000 home with a 6.7% mortgage rate would have a monthly payment of about $2,581. That same $400,000 home at 3% interest would have a monthly payment of $1,686. In a survey by Freddie Mac, 37% of homeowners are concerned about being able to make their payments. Renters feel even more pressure, with 62% worried about making payments on time.
For this reason, experts expect home prices to decline. According to the S&P CoreLogic Case-Shiller index, home prices in the 20 largest cities fell 0.44% -- the first decline since March 2012.
2. Mortgage originations will be cut nearly in half
Freddie Mac forecasts that total loan originations -- including purchase loans and refinance loans -- would be $2.8 trillion this year. That is a dramatic drop from last year when originations were $4.8 trillion.
Demand for mortgages has fallen. Mortgage Bankers Association says total application volume was down six of the last seven weeks, and refinancings are down 84% from last year. Low loan originations would impact companies originating and selling those loans in the open market, such as Rocket Companies (RKT -0.63%) and UWM Holdings (UWMC 2.34%). Slow mortgage originations could weigh on these businesses, as Freddie Mac forecasts originations in 2023 to come in lower, at $2.3 trillion.
Rocket depends heavily on refinancing loans to drive revenue. Last year 81% of its total revenue came from mortgage originations. In the first half of this year, Rocket's gain on the sale of its mortgage loans decreased a whopping 61%. Rocket is shoring up its business, cutting costs, and investing in partnerships to navigate these challenging times.
UWM also relies on originating and selling loans, making up 87% of its total revenue. This year its loan production income dropped 56% to $680 million. With just under $1 billion in cash, UWM will look to maintain its attractive dividend yield and ride out the slowdown in the housing market.
3. The housing shortage will remain a problem for homebuyers
Khater noted that "the number of homes for sale remains well below normal levels." Housing inventory hit record lows in 2021 as people stopped selling their housing amid the pandemic.
However, the housing shortage has been years in the making. Experts believe that the housing crash in 2008 spurred a lost decade where homebuilding failed to keep pace with demand. Millennial demand for homes is also adding to the tight housing inventory. Homeowners are also reluctant to sell their homes if they're already locked into a low mortgage rate.
Experts estimate the shortfall in housing supply could be as high as 5 million units. As a result, home and rent prices will likely stay elevated despite rising interest rates. The housing shortage could be good for apartment REITs such as Equity Residential (EQR 2.41%). Equity Residental could be a solid REIT because it focuses on affluent urban areas in southern California, New York City, and Boston. Its tenants tend to be high earners who want to live in the city close to their jobs. These areas also tend to have more expensive homes, making renting an attractive alternative for young adults.
Homebuilders like Lennar (LEN -1.01%) and KB Home (KBH -1.25%) also stand to benefit from the shortage in the coming years, but they could face headwinds from uncertainty in the housing market in the short term.
These homebuilders should be on good financial footing to weather a downturn. Lennar paid down $575 million in debt and still has $1.3 billion in cash on its balance sheet. The homebuilder believes that housing demand will remain elevated and in a sign of confidence, recently approved a $2 billion stock repurchase plan. KB Home said that its backlog stood at 10,700 homes valued at over $5 billion, which should put it in position for strong deliveries through the middle of next year. When interest rates do eventually stabilize, these companies could see home building pick back up to meet the growing demand.
