The spring housing market is defying expectations that prices would cool and competition would ease.
Higher mortgage rates usually cool both prices and demand, as happened last year, but that’s no longer the case. There are still too few homes for sale because current owners can’t afford to move, keeping prices high.
According to CoreLogic, home prices in February were 5.5% higher than in February last year. The year-over-year comparison is narrowing slightly, but the price increase from January to February was nearly double what is normal for that time of year, suggesting this spring’s market is off to a strong start despite higher interest rates .
The average 30-year fixed mortgage rate hit its latest high in October, briefly hovering above 8%. It then fell back into the 6% range for most of December and all of January. It rose more than 7% in February, which should have cooled the market.
But sales of new construction homes, counted based on contracts signed during the month, rose nearly 6% in February on a year-over-year basis. Pending sales of existing homes, including based on signed contracts, fell 7% that month from a year earlier, but not for lack of demand.
Blocking effect
The real problem in the current internal market is the lack of supply. There are more new listings this spring than last spring, but supply is still 40% lower than it was pre-pandemic.
This is partly because current homeowners are plagued by a lock-in effect: they don’t put their homes up for sale because the cost of moving is too high.
In the 22 years before the Federal Reserve began raising rates in 2022, moving to a 25% more expensive home would have increased the average monthly principal and interest payment by the average homeowner by 40% , or about $400 on average, according to ICE Mortgage data. Technology. Moving to a similar house across the street wouldn’t change their payment at all.
In stark contrast today, the average homeowner with a near-record-low mortgage rate would see their monthly payment increase by 132%, or about $1,800, to be able to move into a home 25% more expensive. According to ICE, buying the same home they are in now would increase their monthly payment by 60%.
These increases represent national averages and may vary from market to market. For example, moving up a tier would add $604 to a homeowner’s monthly payment in Buffalo, New York, an increase of 108%; and $4,517 in San Jose, California, an increase of 161%, according to ICE data.
“Lower rates would make the calculation easier for many and make moves more reasonable. But the net result continues to be too few homes for too many buyers,” said Andy Walden, ICE’s vice president of corporate research. “Until this fundamental misalignment is resolved, simple supply and demand will continue to put pressure on both supplies and affordability.”
What rate would unlock the market?
If rates fell to 6%, increasing the monthly payment to trade in a more expensive home by up to 25% would go from an average jump of 103% to 88% – a modest but welcome improvement, according to Walden.
If rates fell to 5%, going up would require a larger payment of 68%, still much higher than the long-term average of 39%, but perhaps enough to motivate someone with a compelling need or desire to upgrade.
While not all borrowers have record-low rates, many do so in expensive markets because the break-even point on the cost of a refinance is typically lower for borrowers with higher balances, so they have more incentive to do so. They also likely have higher balance loans, so moving to a higher rate would be even more expensive. That’s why the lock-in effect is strongest in much of California, where homes are more expensive.
According to Redfin, the vast majority of borrowers today, 88.5%, have mortgages with rates below 6%. About 59% have rates below 4% and nearly 23% of homeowners have rates below 3%.
These stocks are slightly lower than last year, as some people have chosen to move in the last year, but they show what the market is up against, especially considering the high and still rising home prices.
A new report from Zillow shows that the United States now has a record 550 “million-dollar” cities, or cities where the typical home is worth $1 million or more. That’s 59 million-dollar cities more than in 2023, when home values were weakening due to rising mortgage rates.