Mortgage rates took a BIG drop at the end of last week as the latest inflation numbers came in lower than expert forecasts.

This was welcome news for potential home buyers, but with increasing talk of a recession what is the likely impact on the Frisco area housing market in the months ahead?

I dive into that, and more, in your Frisco housing market update for November 2022.

Watch the following video, or continue reading below, to learn more;

Mortgage Rates vs Home Prices

Ok, so they’re not really in competition with each other…..

While home prices usually get the most attention, mortgage rates can actually have a larger impact on the overall health of the housing market and a buyer’s ability to buy.

When home prices were rapidly rising there was no shortage of buyers submitting competing offers on homes. In many cases, buyers were paying tens of thousands, if not a hundred thousand or more, over the list price to secure the right to purchase a home.

Why? Money was cheap.

When mortgage rates were 3%, paying an extra $75,000 for a home didn’t make that significant of an impact on the monthly payment.

A different story when mortgage rates rose to over 7%.

The unprecedented rise in mortgage rates has shell-shocked buyers and left wondering if the “bubble” was about to burst.

Nobody forecasted mortgage rates to rise as fast as they did so why did they?

Simply answer, inflation…..

Inflation is the enemy of mortgage rates and as soon as the Federal Reserve stopped keeping rates artificially low, they soared!

The following graph shows just how sharp the increase in mortgage rates has been this year;

To put into perspective just how big of a difference mortgage rates make;

Assuming a $550,000 loan amount,

The monthly P&I (principle and interest payment) at 3.25% is $2,394/month
The monthly P&I payment at 7.25% is $3,752/month

Based on the sales data, a tipping point was reached when mortgage rates went over 5.5%. That is the rate over which buyer demand dropped significantly as homes simply became unaffordable for many.

As mentioned above, the reason mortgage rates fell last week was the newly released annual inflation numbers came in lower than expected.

Inflation is generally measured using a 12-month rolling cycle. The reason inflation numbers came in lower is that the lower readings from the first half of last year are now being dropped from the rolling 12-month average.

Inflation is expected to continue falling, which is great news for mortgage rates, but what happens if we head into a recession?

The Impact of a Recession

Of the economists surveyed, the percentage that expect the economy to enter a recession in 2023 has increased from 13% of respondents in early 2022 to 65% last month.

Depending on how severe any recession is, we could see further uncertainty in the housing market, but housing is typically the first segment of the economy to recover and recessions usually result in mortgage rates coming down;

As you can see from the graph above, mortgage rates have declined in each of the past 6 recessions.

Home Prices

Considering buyer demand has declined as mortgage rates have risen, why haven’t we seen bigger declines in home prices?

Home prices are directly related to supply and demand. Although demand has fallen, so has supply, which has decreased downward pressure on home prices.

Supply has been falling for the better part of a decade as homeowners have taken advantage of rising rents and low mortgage rates and turned existing properties into rentals rather than selling when buying a new home.

Even though we have seen declines in home prices over the last few months, it’s important to remember the decline percentages being reported in the media are declines from peak prices.

While the median sales price here in Frisco in October was 14% lower than April’s peak, prices are still up 12.5% year-over-year and 31% over the past two years.

For homeowners that don’t have to sell and don’t wish to turn their existing home into a rental, many have simply taken their homes off the market as there is little incentive to trade a 3% mortgage for one at 7%.

While I do expect we will see some additional softening of home prices here in the Frisco area, there is nothing in the data to currently indicate pricing will turn negative on a year-over-year basis.

Supply remains tight.

The number of homes for sale in Frisco has been falling since July. Even though inventory is up 142% year-over-year, we are still down 48% from where we were in October 2019.

Each week I release a new market report with the latest data on the number of homes for sale, average price, days on market, price reductions, etc. Below is my latest Frisco Market Report. From this report you can search the latest market data for any zip code or city locally or across the nation;

What to Expect in 2023

One of the leading indicators we use to gauge where home prices are likely heading is price reductions.

Here in Frisco, it is common to see approximately 45% to 50% of listings receive a price reduction before going under contract this time of year.

Currently, we are seeing about 63% of listed homes take a price reduction before going under contract. That tells us that homes are still priced above what buyers are willing to pay in the current market and is an indication additional home price declines are likely.

Normally, we start to see the percentage of properties receiving price reductions fall in December through April or May. If price reductions remain elevated as we head into 2023, that will be an indication that we could see prices remain relatively flat next year or decline further.

Currently, depending on which forecast you look at, home prices in Frisco are expected to increase between 1.5% and 5% next year.

Bottom Line

Currently, indications are we are starting to see some balance return to our local housing market. That doesn’t mean we won’t see further price declines, but inventory remains relatively low and homes across all price ranges are going under contract in an average of 42 to 49 days, which is still relatively quick.

New home builders are offering some nice incentives for any home that goes under contract by the end of the year, even those that won’t be ready until April/May. Give me a call at 469-296-5230 or email Andrew@TheAndrewSmithTeam.com for additional information or details.