Hopes were high for the housing market this year, until mortgage rates unexpectedly rose. Home buyers on the hunt in Dallas, who have been waiting for mortgage rates to drop, are finally returning to the market, says Re/Max agent Todd Luong. But it isn’t enough to make a difference overall in home sales in this North Texas metro area.
Despite a strong start to the year, sales there have dragged behind 2023 levels through much of the spring even as listings rose in the double digits, according to Zillow data. Run-ups in mortgage rates, home prices, property insurance, and taxes make homeownership “very unaffordable right now,” says Luong. “That’s a big issue.”
The homebuying season traditionally ramps up after the Presidents Day holiday in February, with buyers and sellers inking contracts through the spring and much of the summer. Hopes were high for housing this year, until mortgage rates unexpectedly rose. Now, it has turned out to be the worst season in more than a decade.
From February through May, existing- home sales, which represent closings, were at their slowest pace for that period since 2011, according to a Barron’s analysis of monthly data from the National Association of Realtors. Applications for loans to purchase a home between mid-February and mid-June are the lowest for that period since at least 2000, according to an analysis ofMortgage Bankers Association data. And yet, the market could be on the verge of a turnaround, with much better prospects for buyers.
Frustrated buyers and unmotivated sellers can blame the favorite boogeyman: mortgage rates. Rates from the middle of February through the final week of spring averaged about 7%—the highest in comparable periods since 2001, FreddieMac data show. The timing couldn’t have been worse. Rising rates squeezed buyers at the time when most house hunters typically start looking.
Many sellers kept their homes off the market, having secured historically low mortgage rates. New home sales, which are a minority of all transactions, have held up better. It wasn’t supposed to be this way. At the end of last year,Wall Street priced in five to six Federal Reserve rate cuts for 2024, which would have driven mortgage rates lower.
“There was a certain amount of optimism,” says Rob Dietz, chief economist for the National Association of Home Builders. “Some of that optimism proved to be misplaced.” But after a painful reality check— rate-cut expectations dwindled to one or two after economic data came in stronger than expected, sending mortgage rates higher—good news could soon outweigh the bad.
Traders’ expectations are more closely aligned with the Fed’s own rate-cut forecast, and recent inflation readings have softened. The 10-year Treasury yield, a benchmark for mortgage rates, has dropped in response. It was recently down nearly half a percentage point from its 2024 closing high reached in April, according to Dow JonesMarket Data. Once lower rates arrive, they will shake up almost every corner of the housing market.
As buyers and sellers re-enter the market, sales will pick up, and existing-home prices will stagnate or drop as supply expands. Lower mortgage rates will take some pressure off monthly payments, allowing some buyers to join the hunt. The magic mortgage rate for unlocking the housing market is about a percentage point lower than recent levels, says Dietz.
The builders trade group expects mortgage rates to average below 6% in the last quarter of 2025. And when they do, there will be plenty more options. The lock-in effect, a term for the financial incentive mortgage holders have to remain in place, has kept supply low relative to demand. It’s a phenomenon National Association of Realtors chief economist Lawrence Yun refers to as the “golden handcuffs.” Lower rates will allow supply to ramp up since “the strength of the golden handcuffs also diminishes,” says Yun.
The number of homes for sale has already started to climb as some owners choose to move regardless of rates, though it remains low relative to historic norms. More existing homes on the market means builders face more competition. Home-builder stocks had a strong run in 2023 as buyers turned to new construction to fill the void. Worries about rising supply, combined with still-high mortgage rates, have pressured shares this year.
The iShares U.S. Home Construction exchange-traded fund that tracks the industry is up 1.3% so far this year, while the S&P 500 index is up 14.2%. Competition fears are overblown, says John Lovallo, a UBS analyst covering the sector. He has Buy ratings on five of the seven builders he covers, including D.R. Horton, KB Home, Lennar, Meritage Homes, and Toll Brothers.
While previously owned homes are typically cheaper than new homes, that difference has eroded. “You’re getting a newer product with all the bells and whistles…and you’re getting it at a price point that’s not much higher than the existing home side,” Lovallo says. And builder stocks could get a boost from rate cuts.
“The trend for rates is probably lower from here,” he says. “That should be very good news for these stocks.” Ongoing gains in supply could shift the existing-home market back in buyers’ favor. Supply growth could soften price gains for these homes or even bring about declines in some markets, says the builders group’s Dietz. Once more owners list their homes, they will “have to do the same kind of price discovery that, quite frankly, builders did over the last two years,” he says.
Builders kept sales going by offering incentives including mortgage rate buy-downs, or price cuts. For now, both sides can be at odds over a home’s price tag. Buyers want deals that largely haven’t materialized, while sellers expect the multiple offers and fast sales of the frothy years during the pandemic, says Northern California– based Rainy Hake Austin, president of international brokerage The Agency. “You’ve got buyers who think it’s 2008, and then sellers who still think it’s 2020,” she says.
Source: Barron's