The housing market’s performance in the spring defied expectations that prices would cool and competition would ease.
Higher mortgage rates typically lower prices and demand, as they did last year, but that’s not the case now. With current homeowners unable to relocate, there are still too few homes for sale, keeping prices high.
According to CoreLogic, house prices rose 5.5% in February compared with February last year. The year-to-year comparison narrows slightly, but price increases from January to February were nearly double what is normal for that time of year, suggesting the market is off to a strong start this spring despite rising interest rates.
The average interest rate on a 30-year fixed mortgage hit its latest high in October, briefly exceeding 8%. It then fell back into the 6% range for most of December and all of January. February’s recovery of more than 7% should cool the market.
However, new home sales, measured by contracts signed that month, increased by nearly 6% year-on-year in February. Existing homes for sale that month (also based on signed contracts) were down 7% from a year ago, but that wasn’t due to a lack of demand.
lock-in effect
The real problem in today’s existing home market is a lack of supply. There are more new homes on the market this spring than last year, but supply is still 40% lower than before the pandemic.
Part of the reason is that current homeowners are suffering from the lockdown effect: They won’t list their homes because the cost of moving is too high.
In the 22 years before the Fed begins raising interest rates in 2022, upgrading to a home that costs 25% more would increase an average homeowner’s monthly principal and interest payments by 40%, or about an average of about $400 tech. Moving to a similar house across the street won’t change their payment patterns at all.
In stark contrast to today, homeowners with mortgage rates near record lows would see their average monthly payments soar 132%, or about $1,800, to move to a home that is 25% more expensive. According to ICE, buying the same house they live in now would increase their monthly payments by 60%.
These increases represent national averages and may vary by market. For example, homeowners in Buffalo, New York, will pay $604 more per month, an increase of 108%; in San Jose, California, it will be $4,517, an increase of 161%, according to ICE data.
“Lower interest rates will make calculations easier for many people and make the move more logical,” said Andy Walden, vice president of corporate research at ICE. “But the end result is still that for too many buyers “There are too few homes.” “Until the fundamental mismatch is resolved, simple supply and demand will continue to weigh on inventory and affordability.”
What interest rates will unlock the market?
Walden said that if interest rates were cut to 6 percent, the monthly payment increase required to purchase a home whose price increases by 25 percent would drop from an average of 103 percent to 88 percent — a modest but welcome improvement.
If rates dropped to 5%, upgrading would cost 68% more, still well above the long-term average of 39%, but perhaps enough to incentivize those with a pressing need or desire to upgrade.
While not all borrowers are seeing record-low interest rates, more borrowers are doing so in expensive markets because the break-even point in refinancing costs is generally lower for borrowers with higher balances, So they have more incentive to do so. Their loan balances are also likely to be higher, making it more costly to raise the interest rate. That’s why the lock-in effect is stronger in much of California, where housing is most expensive.
Redfin data shows that the vast majority of borrowers (88.5%) currently have mortgage rates below 6%. About 59% of homeowners have interest rates below 4%, and nearly 23% have interest rates below 3%.
These stocks are slightly lower than last year, as some people did choose to move last year, but it’s indicative of the challenges facing the market, especially given that home prices remain high and rising.
A new report from Zillow shows that the United States now has a record 550 “million dollar” cities, or cities where typical homes are worth $1 million or more. That’s an increase of 59 million-dollar cities from 2023, when home values weakened due to rising mortgage rates.
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