The housing market is a major component of our economy. The housing market can be a reflection of the overall state of the economy.
Timothy Canty, CPFA, Vice President of Investments of the Wedbush Securities San Diego office says, “Currently, we are seeing a decline in listings. This is because buyers will have to finance at a higher rate, so people are holding off on the urge to move. Additionally, because we have relatively stable rates of employment, people have decided to sit until things get better.”
According to S&P CoreLogic’s Case-Shiller U.S. National Home Price NSA Index released on March 28, home prices declined for the seventh consecutive month in January of 2023.
Current state of the market
Existing home sales declined 2.4% in March compared with February levels according to the National Association of Realtors. Sales for the month were down 22% from March of 2022 levels.
The rate on the popular 30-year fixed mortgage started the year at around 6.5% but had dropped by the end of January. However, from there mortgage rates have risen and by the end of March were averaging about 6.85%.
Canty says, “The challenge is the high interest rates have so far curtailed the inventory of homes. We are not seeing prices go up and we are also not seeing price instability.”
Higher mortgage rates are a key driver of lower home sales. Higher rates make homes less affordable for many buyers. This hurts home sales especially at the higher end of the market.
One factor keeping prices from falling at a larger rate is the inventory of existing homes on the market. In some areas this inventory is some 40% lower than in the pre-pandemic period. New listings in March of 2023 were down 17% from March 2022 levels.
Total existing-home sales jumped 14.5% from Jan 2023 to Feb 2023, ending a run of 12 consecutive months of declining sales. Housing starts rose 9.8% in February, which helps provide inventory.
Overall, it is a strange and complex housing market for both buyers and sellers.
Outlook for the housing market
There are a number of factors that will determine the direction of the housing market as we move forward.
The low supply of existing homes for sale that is keeping inventory relatively low is helping to keep home prices from falling more than they might have given other issues in the economy like higher interest rates. A contributing factor is that some potential sellers might be reluctant to sell and move to another home due to the low interest rate that they have on their current home. They do not want their monthly costs to experience a drastic increase.
Inventory issues still have not fully recovered from the 2008 crash that devastated the housing market at the time. Inventories are currently at about 2.6 months, higher than the 1.6-month level we saw a year ago, but still at a historically low level.
A key factor for prospective home buyers and home builders is the state of the economy. Buyers do not want to take the leap into buying a new home if they are worried about their employment status and their future income. Canty says, “We may see some pressure if we see a substantial drop in employment rates.”
Mortgage rates always play a key role in the health and activity level in the housing market. As mentioned above, a big part of the issue of housing supply is the reluctance of many buyers to move and give up a low rate on their existing mortgage. A recent survey showed that some 82% of homeowners who might consider selling and buying a new home felt locked in by their current low mortgage rate.
Sales of homes at the higher end of the market will suffer as fewer buyers will be able to afford them if they have to take out a mortgage at a higher rate.
High interest rates also impact new home construction. Many people who might like to build a new home for themselves are reluctant to take the plunge if they need to take out a mortgage to make this happen. This not only impacts buyers and sellers, but also impacts home builders and related industries that supply home builders.
Cash sales have been a significant part of the housing market with all cash transactions making up 27% of all sales in March. While down slightly from the prior month, this level is still high historically.
The economy and the level of interest rates will be key factors in determining the state of the housing market in the coming months. The actions of the Fed will continue to be closely watched.
Are you thinking of buying or selling a home? Consult with your Wedbush financial advisor to discuss how this fits as part of your overall financial planning strategy.
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