The Spring housing market in 2023 has been surprising experts as prices continue to soar and competition remains fierce despite higher mortgage rates. Typically, when mortgage rates increase, it cools both prices and demand, as seen in previous years. However, the current Spring market is defying these expectations. The limited supply of homes for sale is a significant factor driving this trend, as many current homeowners are unable to afford a move-up due to high costs, thus keeping prices at elevated levels.
Home prices in February 2023 were 5.5% higher than they were in the same month of the previous year, showcasing a continuous uptrend in prices. Despite a slight decrease in the annual comparison, the price gain from January to February was nearly double the usual for that time of year, indicating a robust start to the Spring market. The inventory of homes for sale continues to lag, with supply remaining 40% lower than pre-pandemic levels. This scarcity is primarily driven by a phenomenon known as the lock-in effect, where homeowners are discouraged from listing their properties due to the high cost of moving up.
The average rate on a 30-year fixed mortgage hit a high in October before dropping back to the 6% range in December and January. It then rose back above 7% in February, which was expected to temper the market. Surprisingly, sales of newly built homes increased by almost 6% year-over-year in February, defying the anticipated slowdown. On the other hand, pending sales of existing homes, based on signed contracts, were down by 7% from the previous year. The primary challenge in the existing home market is the insufficient supply of homes rather than lack of demand.
Historically, the cost of upgrading to a 25% more expensive home would result in a 40% increase in monthly payments for the average homeowner. However, the scenario is vastly different today, with homeowners facing a 132% jump in monthly payments to move up to a more expensive property. This drastic increase in costs is a significant deterrent for homeowners looking to upgrade, impacting both affordability and inventory levels. A national average of these cost increases highlights the immense challenge faced by both buyers and sellers in the current real estate landscape.
Lowering mortgage rates could potentially alleviate some of the burden on homeowners looking to upgrade. A decrease to 6% would reduce the average monthly payment increase for moving up to a more expensive home from 103% to 88%, offering a slight reprieve. Further reduction to 5% would still result in a 68% larger payment, significantly higher than the historical average of 39%. While not all borrowers benefit from record-low rates, there is a substantial portion of homeowners who could benefit from reduced rates, especially in high-priced markets like California.
Recent data from Zillow indicates a record-high number of “million-dollar” cities in the U.S., with 550 cities now having a typical home value of $1 million or more. This marks an increase of 59 more million-dollar cities compared to the previous year, reflecting the ongoing trend of escalating home prices despite economic uncertainties. The real estate market in Spring 2023 continues to present unique challenges for both buyers and sellers, highlighting the need for innovative solutions to address affordability and supply issues.
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