CURRENT HOUSING MARKET DYNAMICS continue to be fueled by the lack of existing homes available for sale, a trend that did not improve during the spring homebuying season, when more homes are typically put on the market. This has supported a return to home price growth in recent months and continued to boost new home construction.
According to commentary from Fannie Mae, mixed data has painted a muddled picture of macroeconomic conditions in recent months, though a recession remains the most likely outcome of the rapid tightening of monetary policy and latestage business cycle dynamics.
“Core inflation remains sticky, having not fallen as rapidly as other price measures, creating upside risk to the Fed funds rate, as noted in the Federal Reserve’s Summary of Economic Projections, and making it likely in our view that it maintains a restrictive posture for longer than most market participants initially anticipated,” said Doug Duncan, Fannie Mae’s chief economist. “Meanwhile, housing prices continue to show stronger growth than what was previously expected given the suddenness and significant magnitude of mortgage rate increases. Housing’s performance is a testimony to the strength of demographic-related demand in the face of Baby Boomers aging in place and Gen-Xers locking in historically low rates, both of which have helped keep housing supply at historically low levels. We do expect housing will be supportive of the overall economy as it exits the modest recession.”
Despite headwinds facing the housing market, the decision to buy and sell is more than just a financial calculation. First American Chief Economist Mark Fleming said existing homeowners may choose to sell for lifestyle reasons, even if it means losing their low mortgage rate. Additionally, 42% of homeowners own their home free and clear, so they are not deterred by higher mortgage rates.
“Existing homeowners are sitting on near historic levels of equity,” Fleming said. “For some of those equity-rich homeowners, moving and taking on a higher interest rate may not hinder their decision to sell— especially if they move to a more affordable place. Yet, in a higher mortgage rate environment where existing homeowners stay put and limit the supply of homes for sale, housing market potential will remain constrained. As a result, the new normal for existing-home sales will be lower than during the pandemic boom years.”
The primary factor limiting housing market potential is existing homeowners staying put, according to Fleming. Traditionally, existing homes make up nearly 90% of the total inventory of homes for sale nationally. Since the start of the pandemic, existing homes have made up on average 75% of all homes for sale.
“You can’t buy what’s not for sale,” Fleming said.
The annual State of the Nation’s Housing report from the Harvard Joint Center for Housing Study (JCHS) highlights the growing housing affordability crisis, despite a slowdown in housing prices.
“Rent growth slowed over the past year, and home prices declined in a number of areas,” said Daniel McCue, a JCHS senior research associate. “Nonetheless, housing costs remain well above pre-pandemic levels thanks to the substantial increases over the last few years.”
McCue noted that although home prices grew 1%, compared to 21% in 2022, they are still nearly 40% over pre-pandemic prices. Rent growth followed a similar pattern, with 4.5% growth in 2023 compared to 15% in 2022, but up 24% since the pandemic.