We are in a crisis.
That’s what homebuilders and homebuyers are saying as 30-year fixed mortgage rates climb to 12-year highs and closing costs needed to complete a home purchase have increased over 40% compared to this time last year. Both are further squeezing buyers in a market already hampered by historically-low inventory and record sales prices.
Sarah Brunais, of Livonia, has been scouring the market for a few months in hopes of finding her first home at the right price and in a desired community, specifically Royal Oak or Farmington Hills which are centrally-located for work. Earlier this week, she was in Royal Oak looking at a $199,000 home located off Crooks Road.
Right now, she leases an apartment in Livonia, but plans on moving back in with her parents until she can find the right home. As a first-time homebuyer with not a lot of cash on-hand to offer over asking price, she knows that she won’t be able to get everything she wants at the price she can afford.
“It’s hard when you want certain things, but home prices are higher,” she said. She’s looking at homes that may need some work acknowledging it “would be nice” to move into a home that’s more turn-key. It’s just one of the adjustments she’s making, especially for those without the ability to compete with other buyers and go pay above asking price or offer cash.
The combination of home price growth, the fastest mortgage rate increase in over forty years, and increased borrowing and closing costs, has affected demand as the market cools.
Compared to early January, 30-year fixed mortgage rates have climbed from 3.22% to 5.1%, according to Freddie Mac data. That’s a 58% increase in a few months and the highest rate since April 2012. Average closing costs increased 13.4% in 2021 with buyers paying an average of $6,905, an increase of roughly $818 over the previous year, according to an April report from CoreLogic’s ClosingCorp.
Closing costs include fees for essential things such as home appraisals by lenders, land surveys, transfer taxes, and recording costs that provide official documentation of the change in ownership. These fees also typically include title policies and can also include property and school taxes.
Although rising interest rates are making homeownership more expensive, it’s also helping to reduce the intense competition for housing over the past year.
“While springtime is typically the busiest homebuying season, the upswing in rates has caused some volatility in demand,” said Freddie Mac Chief Economist Sam Khater. “It continues to be a seller’s market, but buyers who remain interested in purchasing a home may find that competition has moderately softened.”
Teri Spiro, president of the Greater Metropolitan Realtors Association, said rising mortgage rates and closing costs will impact the market, but added there is still plenty of pent-up buyer demand.
“I think what we’re going to see is some people will be priced out of the market,” she said. “Maybe there won’t be six offers on one house, but there is still demand. We are seeing more cash offers than we’ve ever seen. Yes, interest rates are (high) but we are also seeing people trying to make their offer look better by doing things I don’t recommend including going into savings, retirement funds, and borrowing from their parents to get into a house on a cash purchase.”
Although there are many credit-worthy home buyers out there with more than enough income to support a home purchase, she added that many buyers just don’t have the cash reserves necessary to be able to put down a large down payment and lower the monthly mortgage payment despite higher rates.
According to the Mortgage Bankers Association, buyers are beginning to pull back or delay home purchases
While rising costs have impacted the home-buying market, it also affects the home-building market. Through March, there was nearly a 20% decrease in the number of single-family residential permits issued compared to this time last year.
Across Oakland, Macomb, and Wayne counties, a total of 957 single-family residential permits have been issued this year. That’s a 4% decrease when compared to March 2021. In Mount Pleasant, a total of 43 permits have been issued this year, a 39% decrease from this time last year when there were 71 single-family residential permits issued city-wide.
Bob Filka, president of the Michigan Home Builders Association, said there has been a softening of the market with interest rates and closing costs rising to levels not seen in years.
“We are seeing some slowing for new permits,” he said. “Even though we are seeing this softening, most of those permits over the last number of years have been made at the high-end of the market. I’m not saying it’s a good thing, but there’s always lemonade to be made out of lemons.”
For average home prices to come down everyone agrees that it starts with increasing the available homes for sale.
With costs of labor and materials escalating, developers have been forced to build higher-end homes in order to make money and stay in business. Building more affordable homes near the middle of the market is not financially viable for developers, Filka said.
“I do think that as … high-end market cools, you’re going to see more focus and attention on how builders can work with the local governments to build homes in that starter-home price range,” he said. “I think local governments are starting to understand the need for housing options for citizens at different price points, particularly in the middle. The lack of that middle housing stock has pushed and strained every other aspect of the housing marketplace through the rest of the spectrum.”
In order for more homes to be built at middle-range prices, Filka said local governments need to start creating incentives for developers to build at the price. For him, it’s about figuring out how the private sector can work with the public sector for the betterment of the community in building more affordable homes.
The Housing Michigan Coalition, formed in 2021, is advocating for state policy changes that would create or expand tools and incentives for local governments to support the development of rehabilitation of attainable housing supply, which represents as much as 60% of market demand.
The coalition, composed of community, business, and government organizations , worked with a bipartisan group of state lawmakers to craft and introduce a package of bills, called the Attainable Housing and Rehabilitation Act, aimed at increasing affordable housing supply by allowing governments to create “attainable housing districts, expanding Neighborhood Enterprise Zones across the state, and removing state and federal funding requirements when a builder wants to work with a local government on a PILOT project (payment-in-lieu-of-taxes).
These bills target household incomes up to 120% of the area median income, which would be around $96,000 for Macomb, Oakland, and Wayne counties, but around $75,000 for Isabella County, $58,000 for Clare County, and $70,000 for Gratiot County.
“I think that perhaps surprising to hear coming from an association executive that represents very conservative business people,” he said. “But, I think it’s an expression of the dysfunction of the marketplace. You have business people saying I’d love to help this community by building more housing stock of this nature, but they can’t make money.”
According to a recent study by the National Association of Home Builders, for every thousand-dollar increase in the cost of a new home in Michigan, more than 5,400 households are priced out of being able to afford one. There are more than 4.6 million existing homes in Michigan that, on average, are more than 50 years old
Conversely, there are about 16,000 new homes built each year. Filka said the lack of production has led to a shortfall of 200,000 homes statewide, adding, “we should be building 25,000 homes per year just to keep up with the demand.”
The steep ascent in borrowing costs, combined with high home prices across markets, is sidelining more prospective buyers. The figures follow a separate report last week showing sales of previously owned U.S. homes fell in March to the lowest level since June 2020 amid mounting affordability concerns.
While demand is showing more signs of easing, the pipeline for residential construction remains brisk. The number of homes sold in March and awaiting the start of construction — a measure of backlogs – increased from a month earlier to 255,000, the most in nearly a year.
In March, a total of 1,131 closed home sales were recorded in Oakland County, 818 in Macomb County, and 1,340 in Wayne County. All represent decreases over the prior year of 8%, 5.2%, and 8.3% respectively.
Average sales prices were $422,501 in Oakland County, $260,410 in Macomb County, and $213,326 in Wayne County. These represent 11.1%, 6.3% and 6.1% increases over March 2021 with the average percent of list price received topping 100% in all three counties as buyer competition remains stiff amid low inventory.
In a balanced market, months supply of for-sale home inventory hovers around six months. In March, the month supply of inventory totaled 1-2 months across Macomb, Oakland, and Wayne counties.