Single-Family Home Prices Are Bending, Not Breaking

Article originally posted on CoStar on April 26, 2023

The swift rise in mortgages rates over the last year reduced the affordability of single-family houses more rapidly and more severely than what buyers experienced after the Great Financial Crisis.

Mortgage rates have moved within a narrow range since the beginning of year for reasons not particularly related to the housing market, yet remain more than 100 basis points higher than they were this time last year and are 330 basis points higher than two years ago, according to data from the Mortgage Bankers Association.

Mortgage rates at these levels were broadly expected to have a dampening impact on single-family home prices as potential buyers were priced out of the market amid higher financing costs. But home prices have hardly responded as buyers appear to be growing accustomed to a higher rate environment.

The National Association of Realtors reported that the median single-family home price of existing homes sold was down by 1.4% in March from a year before, yet 13.1% higher than two years earlier. After accounting for seasonal factors, the median price edged lower by 0.2% in March, after dipping by 0.4% in April. The rise in mortgage rates has had a more pronounced impact on the number of homes sold than it has had on prices.

What may be keeping national home prices afloat is a combination of migration patterns and affordability measures across regions.

In the South, for example, the National Association of Realtors’ home affordability index measured 128.8 in February compared to the national figure of 103.9, meaning homes are far more affordable in the South. The affordability index measures the ratio between the median household income to the level of income needed to afford the median priced home, so a higher index value represents a more affordable region.

That relative performance has drawn significant migration to cities such as Miami, Tampa, Atlanta, and Charlotte during the pandemic and away from more expensive Northeast and western coastal regions. Those migrants brought with them household incomes higher than the median, and that surge in demand for housing boosted home price growth over the year, pushing gains to the top of the 20-market S&P CoreLogic Case-Shiller Indices. In Atlanta and Charlotte, prices continued to grow in February, gaining 0.5% and 0.1%, respectively.

The opposite has occurred in the West, where the Realtor association’s affordability index measures 89.2 — a far cry from the South. Outmigration from expensive cities has seen housing demand fall, leading prices to weaken. For example, home prices in San Francisco were 10.1% lower than a year ago while prices in Seattle were 9.4% lower. The decline in price accelerated in Seattle, with prices down 1.5% in February alone.

However, prices are likely to remain elevated because few existing homeowners appear willing to list their properties.

Many were able to refinance their existing mortgages at rock-bottom rates during the past few years and would now face far higher costs should they move. This situation has been called “rate lock” and it is causing a shortage of homes available for purchase.

The National Association of Realtors reported that 980,000 homes were on the market at the end of March, well below the 2017 to 2019 average of 1.8 million. After accounting for the seasonal factors, for sale inventory fell by 2% in March after declining by 1.4% in February.

The lack of existing homes for sale has led to a surge in demand for new homes, which developers have been happy to provide.

New homes accounted for about one-third of all single-family homes in March, about double the share from a year ago as builders rush to sell in this high-price environment. Sales of new homes rose by 9.6% in March as mortgage rates fell slightly and homebuyers took the opportunity to sign contracts.

Developers had already pulled back in 2022, but sentiment has improved as many builders see better buyer traffic and strong demand. About 25% of the new homes sold were not even yet under construction, giving builders reason to put shovels to work. The National Association of Home Builders/Wells Fargo Housing Market Index improved in April for the fourth consecutive month.

Despite this recent good news, heightened expectations of a slowing economy and a weaker labor market, in addition to more costly credit, are likely to bring further challenges to the housing market this year.

Data to be released this week include the monthly report of personal incomes and outlays, in addition to the Federal Reserve’s preferred measure of inflation, the personal consumption expenditures (PCE) price index. These are timely indicators that should inform the Federal Reserve’s decision next week whether to add another 25 basis points to its policy rate.

While the more commonly used consumer price index (CPI) has been falling, the Core CPI, which excludes food and energy, actually rose last month, an unpleasant surprise. Of most interest this week will be the Core PCE excluding housing, an inflation measure that has not budged much over the past year and is still at 4.6%, uncomfortably high.