The homeownership dream has been a difficult one to achieve for many Americans in recent months. And so far, in 2023, a combination of low inventory, high mortgage rates and inflation has continued to leave many potential homebuyers on the sidelines.
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But what will be the conditions for August and will the housing market ease off a bit?
“Peering into my crystal ball, I see the trends from July continuing into August,” said James Allen, founder of Billpin.com. “The housing market is like a game of musical chairs right now. The music’s tempo has slowed, but there are fewer chairs to grab when it stops. Active listings are down by 60% year-over-year, creating a tight inventory and pushing median list prices up to $1.2 million, a 3% increase from last year. So, if these trends hold steady, August 2023 could look like a high-stakes round of musical chairs.”
Uncertainty with Mortgages Rates
With mortgage rates at the upper end of their 2023 range headed into August, they are likely to drift lower in the month ahead if economic data cooperates, said Danielle Hale, chief economist at Realtor.com.
As of Aug. 1, the 30-year fixed-mortgage rate average was 7.26%, according to CNET – a far cry from the 3%, 4% and 5% of a couple years back.
Hale added that while the June CPI data showed striking improvement in inflation trends, it didn’t stop the Federal Reserve from hiking its short-term rate at the end of July.
However, she noted that uncertainties remain and rates could bounce higher if CPI is higher than expected in August.
“An uptick in job growth or a smaller than projected improvement in inflation data mid-month could cause mortgage rates to reverse course and climb in August while lower readings could help accelerate the pace of decline,” she added. “With a larger near-term gap between Fed projections (which weren’t updated in July) and market outlook, the potential for sharper adjustments in interest rates, including for mortgage rates, lurks.”
Existing housing inventory continues to lose momentum and is expected to decline in the second half of the year, which will bring the annual inventory figure below year-ago levels, said Hale.
“As a result of inventory declines, we’re likely to continue to see somewhat competitive conditions for home shoppers,” she added. “Even though housing demand has been curtailed by higher costs, housing supply has fallen even further, which is keeping the market more balanced than we would otherwise expect. For this reason, we expect only a gradual decline in home prices for the year, which is likely to persist as we move into August.”
Indeed, homeowners have been holding on to their low mortgage rates, and more than 80% of home shoppers looking to buy and sell feel locked in to their current rates, according to a Realtor.com report. And a recent study conducted by The Harris Poll on behalf of Intuit Credit Karma, found that a whopping 67% of homeowners who plan to sell in the next three years say they would be willing to delay their plans until after mortgage rates go down, with 26% saying they would be very willing to delay their plans.
Hale added that home shoppers who are frustrated by the options available in the existing home market might also consider the new home market.
“Unaffected by the mortgage rate lock-in that’s keeping homeowners out of the market, builders have a relatively more abundant supply of new homes, and pricing has been more flexible for new homes, which dipped 4% from a year ago in June, than for existing homes,” she added.
Home Prices Will Continue to Rise
Just 24 months ago, the average sales price of a home was $357,000 with 20% down and a 30-year mortgage rate was around 3%, which meant monthly payments of $1200, said Peter C. Earle, an economist for the American Institute for Economic Research.
Now the average median price of a home is $414,000. Earle said the average 30-year mortgage rate has more than doubled, adding that the $1200 monthly payment is steadily approaching $1900. By October, that will be without the huge glut of pandemic stimulus savings and the resumption of student loan payments.
“If the Fed holds rates where they are and nothing major changes in the mortgage market, a whole swath of would-be home purchasers are going to be priced out of the housing market,” he added. “This month, in August 2023, the qualifying interest to buy a home is passing $88,000. One year ago that number was $53,000 – 37% lower. That’s the knock-on effect of Fed rate hikes and credit tightness resulting from the spring’s regional bank failures.”
And while there are some indications that the market is cooling, inflation is still at 3% and employment and business activity are deflecting much of the Fed’s rate hike effects – so far, he added.
“A decisive move lower in mortgage rates in the near term looks very, very unlikely,” he said.
Midwest Will be Most Affordable
According to Hale, the Midwest and affordable pockets of the Northeast and South are expected to continue to see the greatest housing activity as relative affordability boosts their appeal.
“This is reflected in a variety of indicators such as our Wall Street Journal/Realtor.com Summer Emerging Housing Markets Index, which identified the best housing markets for home ownership,” said Hale. “In this index, 14 of the top 20, including all of the top 7 markets were Midwestern metros.”
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