1. Weak housing market activity
The housing market’s overall activity has been notably sluggish due to a confluence of factors. High mortgage rates, elevated home prices, and limited housing inventory form a trifecta of challenges that continue to exacerbate the housing affordability crisis. Additionally, the specter of high inflation and interest rate hikes further dampens market sentiment.
Illustrating this, recent data from the National Association of Realtors (NAR) reveals a significant year-over-year decline of 16.6 percent in existing home sales. This underscores the challenges currently affecting the housing market.
2. Resilient prices
Will housing prices drop? Despite certain overheated markets recording price declines, home prices have remained relatively stable. According to the S&P CoreLogic Case-Shiller Home Price Index, home prices fell earlier in the year but have since resumed rising. They are now just 1% below the peak they hit in 2022.
According to The Motley Fool, the median home sales price in the United States was $416,100 as of the second quarter of 2023, down 3% from the first quarter of 2023 when the median home sales price was $429,000. This shows that while prices have fallen, the decline has not been drastic, and the market has avoided a crash.
It is worth noting that local markets in the East have largely begun rebounding, while the West has seen some of the most dramatic price declines as its once booming housing markets reckon with interest rates now hovering over 7%. This shows that while the housing market has problems, widespread crashing prices isn’t one of them.
3. Mortgage rates remain high
Due to ongoing economic uncertainty and the Federal Reserve’s aggressive stance against inflation, mortgage rates have remained high. The current average rate for a 30-year mortgage hovers around 7%, creating a disincentive for homeowners who purchased their properties before 2022 to consider moving. This reluctance stems from the desire to hold onto historically low rates, ensuring manageable payments for years to come.
As of May, approximately 85% of mortgage holders enjoyed interest rates of 5% or lower, with nearly half benefitting from rates as low as 3.5% or less, according to data from Black Knight, a prominent mortgage technology provider. Many homeowners opted to safeguard their financial future by refinancing at rock-bottom interest rates during the COVID-19 pandemic. This trend underscores the significant impact of interest rates on housing market dynamics.
4. Inventory is still at historic lows keeping prices high
The current state of the housing market is characterized by a critical issue: limited supply, which has been a persistent problem preceding the pandemic. In 2019, there was already a shortage of approximately 4 to 5 million housing units, resulting from rapid population and job growth outpacing new construction.
This scarcity intensified during the COVID-19 real estate surge, driven by historically low interest rates that prompted many to enter the market. Furthermore, as homeowners clung to their locked-in low rates, the shortage worsened when mortgage rates rose.
As of July 2023, housing supply remains notably low, with only 1.11 million existing homes available for sale, representing a meager 3.3-month supply. This falls significantly short of the typical 5 to 6 months required for a balanced market, contributing to the current high prices in the housing market.
5. Homeowner affordability is low
The average mortgage rate is projected to remain between 6.5% and 7.5% for the foreseeable future. This makes affordability a huge challenge for many prospective homebuyers. For instance, individuals with monthly budgets of $3,000, who could have purchased a $500,000 home just a year ago, now find themselves limited to homes priced at $429,000.
First-time buyers, in particular, are facing the brunt of this affordability crisis, as the cost of starter homes continues to rise. This trend makes homeownership increasingly unattainable for those grappling with limited down payment savings and incomes that struggle to keep pace with the escalating monthly expenses.
6. Home construction is recovering
According to recent data from the Department of Housing and Urban Development and the Census Bureau, sales of newly built single-family homes jumped in May to the highest level since February 2022, marking a 12.2 percent increase compared with the previous month. This suggests that there is a growing demand for new homes, which is driving the recovery of the home construction industry.
Another factor contributing to the recovery of home construction is the lack of supply on the existing sales market. With many homeowners reluctant to move, buyers are becoming increasingly reliant on new construction. This means that builders benefit from the lack of supply, as they can sell their newly built homes at good prices.
It’s worth noting that builder confidence, as measured by the NAHB housing market index, is currently at a 5-month low of 45. While this may seem like a negative indicator, builders are still motivated to sell their homes, even in the face of high mortgage rates. In fact, many builders are offering perks like cheaper loans or other discounts to ease the pain of higher mortgage rates, which is making their homes more attractive to potential buyers.