30-year fixed mortgage rates are over 7% again, further denting housing affordability for many. Just a few years ago, similar mortgages carried until 3% interest rates. Simple logic suggests that ballooning mortgage spending would raise effective home pricing for many, hurting home values, but there’s an important offsetting trend currently. It’s reduced supply.
Despite falling home prices for much of 2022, home prices have rebounded somewhat in 2023. It appears that rising interest costs are denting demand for housing, but the reduction in supply from home owners holding onto properties at lower rates appears to offset softer demand for now.
Housing Affordability
Housing affordability as tracked by the Atlanta Federal Reserve is now at lows not seen since before the financial crisis of 2008. Yes, prices have risen ahead of incomes in recent years, but rising mortgage costs, as the Fed raises interest rates, are the primary driver of a reduction in affordability since 2021.
The last decline in affordability to these low levels on the Atlanta Fed’s data in 2006-2007 did cause absolute declines in home prices over subsequent years. Initially, that was the trend for most of 2022 as home pries fell, but more recently prices have rebounded nationally on most metrics for the year so far, though the west coast and neighboring states are still seeing falling annual prices.
Lower Inventory
Lower inventory may be driving this trend. Zillow compares current listing levels to pre-pandemic averages and finds that for July 2023 listings are materially below pre-pandemic levels for all major markets. Part of this may be home owners with attractive fixed mortgages in place compared to current rates choosing to stay put.
In fact, recent Zillow research found only 21% of home owners with a mortgage rate of under 5% are considering selling compared to 38% for those with a mortgage costing over 5%. Those locked into low-rate mortgages are almost half as likely to be selling their home. Yes, housing demand may be weaker, but reduced supply may be more than offsetting that currently.
Famed investor Warren Buffett may be seeing this trend too as his company Berkshire Hathaway
BRK.B
is picking up shares in various U.S. home builders according to recent filings, perhaps betting that home prices may hold up better than the market fears. Although these investments are small in the context of his overall portfolio.
Regional Variation
Still housing is a regional market and trends differ by market and region. Currently a lot of the strength in U.S. home prices is driven by the East Coast and Midwest. The West Coast including Nevada, Arizona and Texas, is seeing some of the worst affordability trends and generally softer prices. Prices are estimated to be up around 4% year on year in markets such as Chicago and Cleveland, but have fallen over 8% in Las Vegas and almost 10% in San Francisco.
Seasonal Factors
Seasonal trends matter too, and home prices are often expected to be more robust over the summer months. That said, the strength in prices in 2023 appears more than just a seasonal rebound on current data, albeit we have a few months of the year still to come.
What’s Next?
There’s a chance that the Federal Reserve moves rates higher later this year moving mortgage costs up with it, though we could be pretty close to the top of the interest-rate cycle. Plus, bear in mind, market expectations about how the Fed will act are already factored into long-term mortgage costs so only unexpected actions from the Fed should increase mortgage rates. Hence, on a medium-term view mortgage costs may fall from here should the Fed cut rates more than expected in 2024 as is possible if inflation wanes.
The greater concern is that in a recent speech Fed Chair Jerome Powell indicated that if home prices didn’t soften, then the Fed might consider further rate hike to tame inflation. That’s because the cost of housing is one of the largest components of inflation series given households spend so much on shelter costs.
Still for now, U.S. home prices are holding up somewhat better than expected, despite ramping borrowing costs. If supply remains limited as those with cheap mortgages stay put, then that may continue to support home prices.
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