Buyers remain resilient amidst rising mortgage rates and low inventory, driving above-average price growth. Housing shortage persists leading to record-high prices, impacting inflation and the Federal Reserve.
Prospective buyers eagerly took advantage of the President’s Day holiday last week to go window shopping, according to early data. Orphe Divounguy, a senior economist at Zillow, noted that showing activity was robust, with home touring activity up 19.4% from the beginning of the year, indicating a promising seasonal uptick.
Builders also experienced a positive start to the year, with Douglas C. Yearley, Jr., CEO of luxury home builder Toll Brothers, expressing enthusiasm during a recent conference call. The company even raised its guidance for the full year due to the strong demand they have been witnessing.
Despite the overall positive trend, house hunters, especially first-time buyers, continue to grapple with high housing costs and challenging conditions that have impacted mortgage applications. However, demand from less rate-sensitive buyers and a limited supply of homes for sale could potentially drive above-average home price growth in the upcoming season, potentially causing concerns for the Federal Reserve.
Even with mortgage rates increasing by approximately 0.3 percentage points since the beginning of the year, early demand data shows that buyers have not been deterred. Cris deRitis, deputy chief economist at Moody’s Analytics, mentioned that although rate increases do influence buyer demand, the market has shown resilience thus far.
The low inventory of homes for sale has contributed to an acceleration in price gains, with the median sale price in January rising by 5.1% year-over-year according to the National Association of Realtors. Redfin data also indicates that new homes entering the market are priced just under $400,000, reflecting a 5.6% increase from the previous year.
With supply constraints persisting, there is a possibility that home price gains will continue to escalate. Lawrence Yun, chief economist at the National Association of Realtors, highlighted the ongoing housing shortage as a key factor leading to record-high prices.
Recent data shows that home price appreciation outpaced wage growth for the first time in over a year in January, highlighting a concerning trend in the housing market. This imbalance is a clear indicator of the housing shortage currently facing America.
Due to the way home prices are typically measured from year-ago levels, there is a possibility that prices could see a boost this spring due to last year's lull. In 2023, prices declined from February through June as a result of a rapid cooling in the market following a sharp rise in interest rates the previous year.
Although home prices may not directly affect the consumer price index, they can exert upward pressure on rents. A housing recovery, characterized by increasing home prices among other indicators, has the potential to drive housing inflation back up, posing a challenge for the Federal Reserve.
First-time buyers are particularly vulnerable in this market environment. This demographic, which often consists of younger and less affluent individuals, faces difficulty due to limited home supply in affordable price ranges. The recent rise in interest rates to over seven percent is especially burdensome for these buyers and is deemed a significant concern for the country.
A notable trend is the increase in cash buyers, reaching a decade-high last month. Nearly one-third of buyers paid entirely in cash in January, with many potentially tapping into wealth generated from a booming stock market or home equity gains.
As the housing market grapples with these challenges, it remains to be seen how policymakers and industry stakeholders will navigate the evolving landscape.
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