One consequence of decades-long, ultra-low interest rates is that many homeowners are locked into cheap mortgages and are unwilling to sell their property if it means having to get a new mortgage with a rate several percentage points higher than their current loan.
It can cost homeowners who have the luxury of currently carrying sub-3% or sub-4% mortgage rates hundreds if not thousands, of dollars per month more to move to an equally-priced home. So it comes as no surprise to read the latest news, provided by the National Association of Realtors, that only 1.11 million existing homes were available for purchase in July.
Adjusting for seasonality, the inventory of homes for sale fell for the sixth consecutive month, and now represents about 3.3 months of supply at the current sales pace. This pales in comparison to pre-pandemic times when existing homes available for purchase averaged 1.75 million.
We might expect those for-sale inventories to grow under one of two scenarios. First, the economy could fall into recession, damaging the labor market and forcing some budget-strained homeowners to put their homes on the market or go into foreclosure. Most market-watchers don’t see this happening, though, because the recent surge in home prices has boosted homeowner equity, allowing strapped homeowners to borrow against it. Foreclosure rates, which have ticked higher recently, are still near historic lows.
Alternatively, inventories might rise if there was a pullback in mortgage rates, as this would reduce the costs sellers face when they themselves take out a mortgage. This seems more unlikely than the first scenario, as weakness in the bond market driven by the federal government’s debt issuance has caused mortgage rates to increasingly move higher. Mortgage rates rose to 7.16% during the week ending on Aug. 11, according to the Mortgage Bankers Association, and are likely heading higher through August. Other estimates of 30-year mortgage rates are currently quoting close to 7.5%, unheard of in almost 23 years.
With fewer homes on the market, transaction activity has been bleak. The Mortgage Bankers Association’s purchase index has fallen by 26% from a year ago and 40% from two years ago. The National Association of Realtors is reporting that sales of existing homes dropped 2.2% in July and were 16.6% lower than a year ago.
Higher mortgage rates and a persistent rise in home prices have eroded affordability since the onset of the pandemic. The National Association of Realtors’ housing affordability index for June, which measures the ability of a typical family to earn enough income to qualify for a mortgage loan to buy a typical home (assuming a 20% downpayment), fell to its lowest levels since June 1985 — even lower than during the Great Financial Crisis. The latest seasonally adjusted reading at 94.7 is likely heading lower as it has not captured the most recent increase in mortgage rates — nor the recent increase in existing home prices, which notched a third consecutive monthly gain in July after seasonal adjustments.
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