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The total value of homes in the U.S. rose 5% from a year ago to $47.5 trillion, Redfin (NASDAQ:RDFN) said in a recent report. But how can this happen if persistently high mortgage rates hinder housing demand?
Everything comes down to supply and demand. Simply put, the shortage of homes for sale has supported values. The supply shortage stems from homeowners’ reluctance to list their homes on the market to avoid giving up exceptionally low mortgage rates that they had locked in before the Federal Reserve began raising rates in March 2022. This dynamic is known as the effect lock-in, which can ultimately lead to a lower supply of housing and, therefore, higher prices.
During the pandemic era, about four years ago, mortgage rates fell below 3%, in a move that sparked a home-buying frenzy. Now, with the Federal Reserve keeping borrowing costs at the highest level since 2001 to contain inflation, mortgage rates were hovering near the 7% mark as of Feb. 22, according to a Freddie Mac survey.
“American homeowners are doing well,” said Chen Zhao, head of economic research at Redfin. “They hold a tremendous amount of wealth, despite low buyer demand, because home values have skyrocketed during the pandemic, and now a supply shortage is preventing those values from falling.”
The average home in the United States was valued at $495,183 in December, up from $474,740 a year earlier, according to the report, which estimated December home values using Redfin appraisal, MLS data and public records. The Redfin estimate covered more than 90 million residential properties.
The closely watched S&P CoreLogic Case-Shiller Home Price Index confirms Redfin’s (RDFN) results. On a y/y basis, the non-seasonally adjusted 20-city composite HPI rose 6.1% in December, exceeding the 6.0% increase expected and accelerating from November’s 5.4% rise.
“Prospective homebuyers are not so lucky,” Zhao added. “The combination of high mortgage rates, high home prices and a limited number of homes for sale means homeownership is more unaffordable than ever. But, if the Fed were to start cutting rates later this year – something widely expected by both monetary policymakers and markets – first-time homebuyers could catch a break.
Construction companies (BATS: ITB) have generally responded to housing affordability by cutting prices or offering mortgage rate reductions. Sure, that resulted in lower margins, but single-family home builders had some breathing room after earning strong profit margins during the pandemic housing boom.
D. R. Horton (NYSE:DHI), the largest homebuilder in the United States, last month reported fiscal first-quarter earnings below analysts’ average estimate, as high mortgage rates continue to weigh on the housing sector, but net sales orders rose on a annual.
Toll Brothers (NYSE:TOL), which last week delivered better-than-feared fiscal first-quarter earnings, forecasts that demand for new homes will remain strong in 2024, thanks to “a healthy job market, improving consumer confidence and persistently low levels of resale stocks”.
Fitch Ratings expects 2024 to be a turning point for home prices. Citing modest improvements in new home sales and inventory, “there are signs of a gradual thaw in the U.S. housing market,” the credit rating agency said in a report on Friday. Therefore, nominal domestic home prices are expected to decline 0%-3% this year compared to 5.5% in 2023.
If this works, keep an eye on real estate brokers, who should benefit from the increase in transactions. Other publicly traded real estate brokerage stocks include: Anywhere Real Estate (HOUS), Re/Max (RMAX), Zillow (Z) (ZG), eXp World Holdings (EXPI), and Compass Inc. (COMP).