A Challenging Era for Homebuyers
Home prices surged to an unprecedented high last month, with recent data highlighting the increasing difficulty of purchasing a home. Elevated mortgage rates have sidelined many potential buyers and sellers, contributing to a scarcity of available homes and driving up prices for those on the market.
Here are four key insights into the current housing market:
Low Activity in Buying and Selling
May, typically a peak season for real estate, saw a decline in existing home sales compared to April, with a 2.8% drop from the previous year, as reported by the National Association of Realtors. Elevated mortgage rates have made home purchases more costly, pushing potential buyers out of the market. Additionally, current homeowners are hesitant to sell due to their existing lower mortgage rates.
The limited number of homes being sold are fetching higher prices, with the median home price in May reaching a record $419,300. Affordable homes, including starter homes, are becoming increasingly scarce. Jessica Lautz, deputy chief economist for the Realtors association, noted, “At lower price points, people are being priced out of the home-buying market, and there’s just less inventory when we think about homes that are under $250,000.”
Slight Relief in Interest Rates
There is some positive news: interest rates have slightly decreased in recent weeks. Freddie Mac reported an average rate of 6.87% on a 30-year mortgage this week, down from 7.2% in early May. Mortgage rates might fall further if the Federal Reserve reduces borrowing costs later this year. However, current rates remain more than double what they were pre-pandemic, significantly increasing the monthly payments required for home purchases today.
Increasing ‘For Sale’ Signs
While the number of homes on the market remains low by historical standards, there is a slight increase. The Realtors association noted that there were 1.28 million homes for sale at the end of May, an 18.5% increase from a year ago. Despite higher interest rates, life events such as new jobs, births, or family changes are compelling some homeowners to sell. Lautz explained, “Perhaps they have a new job or a new baby or a family change. We’re seeing new inventory come into the market because of these traits.”
Decline in New Home Construction
Previously, the shortage of existing homes allowed new home builders to help fill the market gap. In April, nearly one-third of homes for sale were newly built, compared to 13% before the pandemic. However, new home construction has slowed, potentially exacerbating the shortage of homes for sale. Builders started 5.2% fewer single-family homes in May than in April, and building permits for future construction also fell by 2.9%.
A Tough Market for Buyers and Sellers
The current housing market presents significant challenges for both buyers and sellers. Elevated mortgage rates and a lack of affordable homes have pushed many potential buyers out of the market. The median price of a home sold in May hit a record $419,300, driven up by the scarcity of lower-priced homes. Lautz pointed out, “At lower price points, people are being priced out of the home-buying market, and there’s just less inventory when we think about homes that are under $250,000.”
Despite some relief with a slight drop in interest rates, the overall cost of homeownership remains high. The average rate on a 30-year mortgage dropped to 6.87%, offering some respite compared to early May’s 7.2%. Future reductions in borrowing costs by the Federal Reserve could further lower mortgage rates, but current rates are still significantly higher than pre-pandemic levels, doubling the monthly payments required for new homeowners.
Slight Increases in Home Listings
The number of existing homes on the market, while still low, is slowly increasing. The Realtors association reported 1.28 million homes for sale at the end of May, marking an 18.5% rise from the previous year. This increase is partly due to life events that necessitate moving, such as job changes or family expansions. Lautz mentioned, “Perhaps they have a new job or a new baby or a family change. We’re seeing new inventory come into the market because of these traits.”
Challenges in New Home Construction
While new homes previously helped to mitigate the shortage of existing homes, the pace of new home construction is now slowing. In April, new builds accounted for nearly one-third of homes for sale, compared to 13% before the pandemic. However, builders started 5.2% fewer single-family homes in May than in April, and building permits for future construction also decreased by 2.9%.
Conclusion
The current housing market is marked by high prices, limited inventory, and elevated mortgage rates, making it a challenging environment for both buyers and sellers. The median home price has reached a new high, and the lack of affordable homes continues to price many out of the market. While there has been a slight decline in interest rates, they remain significantly higher than pre-pandemic levels, resulting in higher monthly payments for new homeowners.
The slight increase in home listings offers some hope, driven by life events necessitating moves. However, the slowdown in new home construction may worsen the shortage of homes for sale. As the market navigates these challenges, potential buyers and sellers must adapt to the evolving landscape.
Lautz’s insights encapsulate the current market’s complexity: “At lower price points, people are being priced out of the home-buying market, and there’s just less inventory when we think about homes that are under $250,000.” Despite these challenges, the market continues to show signs of resilience, with some increase in listings and potential for further declines in interest rates.
