Odeta Kushi From First American: The Tale of Two Markets Continues…For Now
Odeta Kushi is deputy chief economist at First American, Santa Ana, Calif.
Even with more existing-home inventory on the market than last year, today’s potential home buyers face one of the least affordable markets in history due to record-high and still-rising home prices and elevated mortgage rates.
Each month, First American uses our Existing-Home Sales Outlook Report to ‘nowcast’ existing-home sales based on the historical relationship between sales, demographic trends, house-buying power and the prevailing financial and economic conditions. Given this difficult environment, it’s no surprise our June nowcast has existing-home sales falling modestly compared with May, and down from one year ago.
It’s a daunting market for potential first-time home buyers, who don’t have the cash from the sale of an existing home to bring to the closing table. Existing homeowners, however, continue to benefit from the wealth effect of home equity growth, resulting in a bifurcated housing market comprised of the equity-rich and the affordability-challenged.
But, even in this housing market, it’s not all smooth sailing for those with equity-filled sails or sales.
All That Equity Often Isn’t Enough
According to our latest Potential First-Time Homebuyer Outlook Report, the median renter, who can also be considered the median first-time home buyer, could only afford 29 percent of homes for sale nationally, which is down from 34 percent a year ago. A perfect storm of higher mortgage rates, record-high house prices, and a chronic housing shortage has driven affordability to record lows, pricing many potential first-time home buyers out of the market and keeping a lid on home sales. But, given record levels of equity nationwide, why aren’t existing homeowners moving up to new homes?
On one hand, it is economically rational to believe that record levels of equity would prompt homeowners to use that equity to purchase a larger and more attractive home – the wealth effect of rising equity. Indeed, existing-home sales in May were strongest at the upper end of the market, as sales of homes over $1 million increased nearly 23 precent, followed closely by homes in the $750,000-to-$1 million range, which increased 13 percent nationally.
Tellingly, the share of all-cash home sales surged to a decade high earlier this year. Some existing homeowners are playing ‘housing musical chairs’ by selling to each other. The wealth effect is particularly pronounced for sellers moving to a more affordable area.
On the other hand, while a homeowner may have a lot more purchasing power because their home has appreciated, the price of the bigger and better home they are interested in has appreciated as well. And, even if the owner has the purchasing power, it’s hard to buy what’s not for sale. While inventory for new and existing homes has increased in recent months, it remains historically low. Existing homeowners today considering listing their home for sale must first contend with finding something to buy. The fear of not finding something to buy amid historically low inventory is one reason tenure length reached a high of just over 11 years in June. Furthermore, low mortgage rates are locking many homeowners in place, especially those who refinanced into rock-bottom mortgage rates over the course of the pandemic. So, when ‘wealth effect’ confronts the mortgage rate lock-in effect, it’s often the rate lock-in effect that prevails, discouraging existing owners to sell.
Some Reason for Optimism on the Horizon
Today’s housing market is challenging for potential first-time home buyers, who must save for a down payment amid rising home prices and dampened purchasing power due to elevated mortgage rates. Yet, once you become a homeowner, the benefit of accruing housing wealth can be significant.
Existing homeowners considering a move also face obstacles, such as the rate lock-in effect and limited inventory. However, they benefit from increased home equity, which they can leverage for a larger down payment or even to pay all cash, potentially offsetting higher mortgage rates. Slower price appreciation and lower mortgage rates appear to be on the horizon, which would benefit everyone, but especially first-time buyers.
June 2024 Existing-Home Sales Outlook
For the month of June, First American updated its Existing-Home Sales Outlook Report to show that:
Existing-home sales for June are expected to decrease 0.03 percent from May’s pace of sales and will be down nearly 9 percent compared with the predicted pace of sales a year ago.
The largest contributors to the projected monthly change are a strengthening lock-in effect (-0.31 percentage points) and slowing household formation (-0.08 percentage points).
