Traditionally Busy Homebuying Season Dampened by “Higher-For-Longer” Rate Environment - 6.27.24
by Ryan Schoen , Principal Market Analyst
Quick Hit
Mortgage rates above 7% and the high interest rate environment in general continue to take a toll on new home construction activity, homebuilder sentiment, homebuyer/seller sentiment, and both existing and new home sales. The traditionally busy homebuying season is being dampened by the “higher-for-longer” theme that continues to play out, frustrating all those connected to the housing market. On a positive note, inventory levels are picking up, which should make option-starved homebuyers happy and result in more transactions in the future.
Key Points & Stats
- Housing starts plunged 5.5% in May, below the downward revision for April. Multifamily fell 6.6% to the lowest annualized pace for construction activity since April 2020. Single-family starts decreased 5.2% but remained 18.8% higher on a year-to-date basis relative to last year.
- Builder confidence in the market for new single-family homes was 43 in June, down 2 points from the previous month.
- Fannie Mae's Home Purchase Sentiment Index (HPSI) decreased by 2.5 points in May to 69.4.
- Existing home sales were essentially flat in May, down 0.7% from April to a seasonally adjusted annualized rate of 4.11 million units, representing a 2.8% deceleration from the year prior. New home sales fell 11.3% to 619 thousand units in May, the weakest pace since November 2023. New home sales accounted for 15.1% of total home sales and 27.3% of total inventory in May. The existing inventory of homes for sale stood at a current sales pace of 3.7 months, with new home inventory climbing to 9.3 months of supply.
- The median price of an existing home sold was $419,300, a record-high price in the Realtors’ recording and up 5.8% year over year. That pushed the mortgage payment for a 30-year fixed rate on the median-priced home north of $3,500, more than double what it was just five years ago. It also was the first time since June 2005 that the median price for an existing home surpassed the median price for a new home at the national level.
- Nationally, the top 20% of real estate agents accounted for 64% of home sales over the last 12 months. That figure jumps to 76% in Kansas, 70% in Florida, and 68% in New Jersey. Limiting the top realtors to the top 5% results in a surprising 34% of sales and limiting the top realtors to the top 1% still yields an astonishing 15% of sales.
Homebuilders & Consumers Sour on The Housing Market
Mortgage rates above 7% and the high interest rate environment in general continue to take a toll on new home construction activity and homebuilder sentiment as high financing costs are making it more difficult for builders to get acquisition, development, and construction loans while elevated mortgage rates are weighing on homebuyer demand.
Housing starts plunged 5.5% in May, below the downward revision for April.
The majority of the decline came on the multifamily side as residences with 2-4 units (condos and townhouses) and structures with 5+ units (apartment complexes) fell 6.6% to the lowest annualized pace for construction activity since April 2020 as builders work through backlogs from a record number of multifamily projects that were in the works last summer. Single-family starts decreased 5.2% but remained 18.8% higher on a year-to-date basis relative to last year, albeit in comparison to weak early 2023 data.
The decline in housing starts is finally starting to catch up with lukewarm builder confidence (at best) which has seen its strong correlation somewhat decouple in 2023 and 2024 as homebuilders had continued to lean into construction activity in spite of their hesitation to do so given the poor interest rate environment, chronic labor shortages and a dearth of buildable lots.
The higher-for-longer interest rate environment, which continues to place significant downward pressure on builder sentiment and overall building conditions, resulted in builder confidence in the market for new single-family homes slipping to 43 in June (a reading below 50 indicates a negative outlook on home sales), down 2 points from the previous month.
The three component indices also posted declines in June and were all below the key 50-point threshold for the first time since December 2023. Current sales conditions fell 3 points to 48, expected sales in the next six months dropped 4 points to 47, and prospective buyer traffic declined 2 points to 28. The one area to buck the overall trend to the downside is homebuilder sentiment in the Northeast region, where sentiment increased to 62.
Consumers echo the similar sour sentiment that homebuilders are reporting as Fannie Mae's Home Purchase Sentiment Index (HPSI) decreased by 2.5 points in May to 69.4.
Doug Duncan, Fannie Mae Senior Vice President and Chief Economist, noted, “While many respondents expressed optimism at the beginning of the year that mortgage rates would decline, that simply hasn’t happened, and current sentiment reflects pent-up frustration with the overall lack of purchase affordability. This is most clearly evidenced by our ‘good time to buy’ component falling to a new survey low this month. On the other hand, homeowners’ perception of home-selling conditions declined only slightly and remains largely positive after a steady increase over the last few months. This suggests to us that, despite the so-called ‘lock-in effect,’ some homeowners may increasingly want or need to sell their homes for a myriad of non-financial reasons, which may lead to an increase in listings in the near future. As our latest forecast notes, we expect improvements to housing inventory will lead to slightly increased sales activity through the end of the year.” If there's a silver lining, that was it at the end.
As Doug Duncan alluded to, consumer attitudes toward homebuying conditions reached an all-time survey low. Just 14% of consumers indicated that it's a good time to buy a home, while the share believing it's a good time to buy a home fell from 67% to 64%.
Additionally, consumers are finally starting to come around to the idea that this environment will be here for the foreseeable future. They are increasingly reporting expectations that home prices and interest rates will likely “stay the same” over the next 12 months. This could also possibly lead to more transactions as buyers and sellers decide to get in the game because the game isn't changing.
Existing & New Home Sales Retreat but Inventory Increases
The elevated rate environment and related deterioration in sentiment is reflected in weak existing and new home sales.
Existing home sales were essentially flat in May, down 0.7% from April to a seasonally adjusted annualized rate of 4.11 million units, representing a 2.8% deceleration from the year prior. New home sales fell 11.3% to 619 thousand units in May, the weakest pace since November 2023. However, over the last few months new home sales have consistently been revised up, so take that figure with a grain of salt.
The larger decline in new home sales resulted in the share of new homes slipping to 15.1% of total sales. The lack of sales is not an inventory issue, as both existing and new inventory rose in May.
The existing inventory of homes for sale increased 6.7% month-over-month and stood 18.5% higher than in May of last year, sending the current sales pace to 3.7 months. New home inventory also increased 1.5% month-over-month, making the current sales pace surge to 9.3 months of supply. In total, housing inventory currently stands at 1,760,000, the highest level since July 2022.
The more abundant supply of homes on the market is a welcome sign for all housing market participants. If inventory continues to rise, we can expect to see home prices gains slow in the coming months, option starved buyers enticed to enter the market, and a boost in home sales.
The desired result is certainly higher inventory, leading to more transactions. However, a slowdown in home price growth comes in as a highly desired second result. In May, the median price of an existing home sold was $419,300, a record-high price in the Realtors’ recording and up 5.8% year over year. That pushed the mortgage payment for a 30-year fixed rate on the median-priced home north of $3,500, more than double what it was just 5 years ago. It also was the first time since June 2005 that the median price for an existing home surpassed the median price for a new home at the national level.
The resulting mortgage payment-to-income math means that the median-priced home now accounts for 59.2% of the average hourly worker's monthly wages, with 44.8% going to principal and interest alone. It also means that the average wage earner would take 2.02 years to save enough for a 3.5% down payment and 11.5 years to save 20% at a savings rate of 10% of their income.
Top Realtors Dominate Home Sales
With the lack of home sales becoming a major burden on lenders and loan officers, one strategy that needs to be prioritized is forging relationships with top realtors. Recently published data reveals that many of the top real estate agents are not only holding market share but also taking it.
In fact, the old 80/20 rule, which states that 80% of outcomes result from 20% of causes, plays out pretty close in the housing market as well. Nationally, the top 20% of real estate agents accounted for 64% of home sales over the last 12 months. That figure jumps to 76% in Kansas, 70% in Florida, and 68% in New Jersey.
Limiting the top realtors to the top 5% results in a surprising 34% of sales, and limiting the top realtors to the top 1% still yields an astonishing 15% of sales.
Why do top agents hold so much market share? ResiClub notes:
- Skill level: Many top agents typically have more experience and have honed their skills over many years, making them more effective at closing deals.
- Market knowledge: Many have deep knowledge of their local market, trends, and pricing.
- Networks: Top agents often have extensive networks of contacts, including other agents, lenders, contractors, and potential buyers or sellers.
- Repeat clients and referrals: They often have a large base of repeat clients and receive numerous referrals, leading to a steady stream of business.
- Marketing power/brand recognition: High-performing real estate agents typically invest in advanced marketing tools and strategies, such as professional photography, staging, online marketing, and social media campaigns. They often work with well-known agencies or have established personal brands that attract clients.
The one caveat to note for lenders is that referrals from a realtor are just 7th on the list of the most important reasons a borrower chose their lender at 21%.
More importantly 68% of respondents to the ICE Mortgage Technology 2024 Borrower Insights report noted that finding the lowest rate and 47% of respondents said low lenders fees were most important. However, despite those top two arguments, ICE notes that 36% of borrowers only considered one option before selecting their lender and 48% considered two.