by Pierre G. Villere
With the rifle-shot increase in interest rates over the last 18 months, catapulting from near zero for certain commercial credits to well over 6.5 percent for home mortgages, we are experiencing something we have not seen in decades: homeowners are sitting on their hands and staying put in their homes, corralled by 30-year fixed mortgage rates that are so low, they can’t upsize or downsize without the realities of a far higher interest rate. And likewise, listing their home for sale faces the same dilemma; they know many buyers are challenged by affordability as a result of the much higher interest rates that prevail, so it discourages homeowners from listing their houses for sale.
This reality has had a huge impact on the resale market this spring. Homebuyers again had a hard time snagging a house in April, with signed contracts not budging from the month before, during what is supposed to be the busiest season for buying. The National Association of Realtors’ index of pending home sales remained at a 78.9 reading in April, posting no change from March when the index unexpectedly tanked 5.2 percent. On a yearly basis, pending transactions dropped by 20.3 percent. The gauge, a leading sign of the housing market’s health, further accentuates how inventory challenges are thwarting buyers still in the market as elevated mortgage rates convince homeowners to delay their selling plans. A separate study by Altos Research revealed the inventory of single-family homes for sale in the U.S. fell to 419,000 in mid-May, during a period when listings typically inch up. One economist was quoted as saying that homeowners are “quiet quitting” the housing market.
Going back to the NAR, their chief economist issued a sweeping statement, warning that affordability challenges certainly remain and continue to hold back contract signings, and that a sizable increase in housing inventory will be critical to get more Americans moving. The inventory crunch coupled with higher prices have made purchasing conditions more difficult. Homebuyers are snapping up the few available homes quickly despite the higher mortgage rates, thus keeping home prices from falling much.
In April, the average rate on the 30-year fixed mortgage ranged from 6.27 percent to 6.43 percent, according to Freddie Mac, with the rate climbing higher as the month progressed. Buyers in early June continued to feel the brunt of higher rates, with the rate on the average 30-year fixed mortgage jumping to 6.57 percent, up from 6.39 percent at the end of May.
Those higher rates have affected the market in two ways: first, affordability has deteriorated for buyers. The national median payment applied for by buyers increased 0.9 percent to $2,112 from $2,093 in March, according to new data from the Mortgage Bankers Association. That has kept many buyers on the sidelines, while others have been enticed back to the new home market by deals provided by homebuilders.
Secondly, a whopping 90 percent of homeowners with mortgages have a rate below 5 percent, far better than the prevailing rate. It makes sense then that existing homeowners are reluctant to give up their low-rate mortgages, which has therefore led to these historically tight resale inventories.
The NAR reports total housing inventory climbed to 1.04 million units of existing homes in April, up 7.2 percent from March’s figure and down just 1 percent from a year ago. But that seasonal increase is smaller than the historical average of 10 percent. April’s supply of homes sat at 2.9 months, better than in March and a year ago, but far below the six-month supply that is considered a healthy market.
“You can’t buy what’s not for sale,” one economist said. For now, expect inventories to stay in very short supply until the Fed starts lowering interest rates, which could be well into 2024. In the meantime, expect a much tighter inventory of homes for sale, and the attendant price increases that will accompany that reality. Watch new home builders offer mortgage rate buydowns which will pivot homebuyers to the new housing market, thus helping residential concrete demand.
Pierre G. Villere serves as president and senior managing partner of Allen-Villere Partners, an investment banking firm with a national practice in the construction materials industry that specializes in mergers & acquisitions. He has a career spanning almost five decades, and volunteers his time to educating the industry as a regular columnist in publications and through presentations at numerous industry events. Contact Pierre via email at pviller[email protected]. Follow him on Twitter – @allenvillere.