The Tug-of-War in 2023’s Real Estate Market: High Mortgage Rates, Low Inventory, and Resilient Home Prices

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In the grand theater of the American housing market, high mortgage rates have set a new stage, while a scarcity of home listings has drawn the curtains on many potential buyers. Yet, even as the spotlight turns onto the uncertainty of the current climate, an eager audience waits in the wings, ready to spring into action as soon as the rates decline and more homes flood the stage.

Over the last four weeks, culminating on May 28, pending home sales have seen a tumble of 17% from the same period a year earlier. This significant dip in sales numbers marks one of the most considerable declines since the beginning of the year. Notably, this slump is amplified against the backdrop of last year’s mortgage rate hike that had already instigated a drop in sales.

The winds of change have also swept through the earlier stages of home buying. Seasonally adjusted metrics of home buying intent show a dip over the past month. Both mortgage-purchase applications and the Redfin Homebuyer Demand Index, a barometer for home tours and other services requests made to Redfin agents, have seen a reduction of around 7% from a month ago. This dip, however, does not tell the whole story. A year ago, these metrics were falling rapidly due to increasing rates; hence, despite the dip, the Demand Index records a slight 1% rise from a year ago, its first annual increase in over a year.

But the trials faced by prospective homeowners do not stop here. Average weekly mortgage rates have peaked at 6.79%, the highest they’ve been since November. This surge in rates has rendered the housing market out of reach for many potential buyers, driving the typical U.S. homebuyer’s monthly housing payment to a record high of $2,651. Adding to the woes of aspiring buyers is the dwindling inventory of homes for sale. New listings have dropped by a staggering 23% year over year, contributing to an overall decrease in the number of homes for sale by 3%. Yet, amidst these challenges, there emerges a silver lining: the scarcity of listings is keeping home prices afloat.

Despite the turbulence, prospective buyers aren’t bowing out. They’re on their toes, ready to make offers and secure mortgages once the rates slide down closer to the 6% mark, and more listings enter the market. In these unusual times, buyers are getting creative with their strategies, some going so far as to make all-cash offers, while others opt for mortgage-rate buydowns or plans to refinance in the future.

Leading indicators provide us with a better understanding of the current state of home buying activity. In the week ending June 1, the average 30-year fixed mortgage rate had climbed to 6.79%, up from 6.57% the week before. This is the most significant weekly increase since October, the highest rate witnessed since November. Mortgage-purchase applications, when adjusted seasonally, dipped by 3% from a week earlier, marking a sharp 31% fall from a year ago. The Redfin Homebuyer Demand Index also saw a week-on-week dip of 4%, although it was up 1% from a year earlier, marking the first annual increase in over a year. Significantly, Google searches for “homes for sale” fell by about 12% from a month earlier, indicating a lessening public interest.

Other notable metrics include a 2% rise in touring activity since the start of the year, as per home tour technology company ShowingTime. Though seemingly a positive sign, this increase pales in comparison to the same time last year, which saw a 6% increase.

As we navigate through the ever-evolving landscape of the housing market, it's essential to spotlight some key takeaways. The median home sale price currently stands at $377,750, marking a slight decline of 1.9% from a year earlier, the smallest drop witnessed in two months. Pending home sales are down 17% year over year, the second-largest dip since January. New listings of homes for sale fell by a concerning 23.4% year over year, maintaining a ten-month streak of double-digit declines. 

Home-sale prices declined in 30 metro areas, with the sharpest falls in Austin, TX (-16.4% YoY), Oakland, CA (-11.5%), Las Vegas (-9.9%), San Francisco (-8.6%) and Sacramento, CA (-8.5%). Conversely, some cities saw an increase, most notably Milwaukee (9.3%), Cincinnati (6.4%), Miami (5.7%), Fort Lauderdale, FL (5.4%), and Newark, NJ (4.7%).

Significantly, 34.9% of homes that went under contract had an accepted offer within the first two weeks on the market, which is down from 40% a year earlier but up from 33% a month earlier. The number of homes sold above their final list price was 34.7%, the highest share since September, but still down from 54% a year earlier.

What can we infer from all this data? First and foremost, the housing market remains a complex and evolving entity, shaped by numerous factors. A robust understanding of the market's current state can provide invaluable insights for both prospective buyers and sellers. So, as the curtain falls on another day in the grand theater of the American housing market, we watch and wait, anticipating the next act in this ever-unfolding drama.

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