Housing market shows signs of life as mortgage rates dip

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Published Date 9/30/2024

It starts with a whimper and builds to a trend. At least that’s what the housing and real estate industries hope for. Realtor’s Melissa Dittmann Tracey says a modest improvement in housing affordability may motivate more home buyers to make a move and cites the most recent NAR housing report.

In a heartening turn of events, the housing market exhibited a modest uptick in August, offering a glimmer of hope to prospective homebuyers who have been grappling with challenging market conditions. The National Association of Realtors’ Pending Home Sales Index, a forward-looking indicator based on contract signings, reported a slight increase of 0.6% in August. While this figure may seem insignificant at first glance, it represents a noteworthy shift in the market's trajectory, especially considering that contract signings remain 3% lower than the previous year.

The primary catalyst for this unexpected boost appears to be the recent decline in mortgage rates. NAR Chief Economist Lawrence Yun attributes this "slight upward turn" to improved housing affordability, albeit marginal. However, Yun is quick to point out that despite this positive development, contract signings continue to hover near cyclical lows, even as home prices persistently climb to new record highs.

The housing market's competitive nature remains evident, with 20% of homes sold above list price in August, according to Realtors’ Confidence Index Survey — a statistic that underscores the ongoing challenges faced by potential buyers in securing their dream homes. Adding to the complexity, the median existing-home sales price in August rose to an eye-watering $416,700, marking a 3.1% increase from the previous year. This surge has brought existing-home prices remarkably close to new-home prices, which stood at a median of $420,600 in August.

Home builders are adapting to this evolving landscape by ramping up their entry-level inventory and employing price incentives to attract buyers. The National Association of Home Builders (NAHB) reports that new-home sales below $300,000 comprised 18% of the sector's sales in August, a significant increase from 12% a year earlier. This shift in strategy could potentially open up new opportunities for first-time homebuyers who have been priced out of the market.

“The relationship between mortgage rates and buyer behavior continues to be a crucial factor in the housing market's dynamics,” says Tracey. Recent weeks have seen a slight uptick in mortgage applications for home purchases, rising 2% compared to the same period last year. This increase coincides with mortgage rates dropping to two-year lows.

However, many potential buyers appear to be adopting a wait-and-see approach, with approximately 40% of consumers expecting mortgage rates to decline further over the next year, according to Fannie Mae's Home Purchase Sentiment Index. “This cautious optimism is partly fueled by the Federal Reserve's recent decision to lower its benchmark short-term rate, which many hope will translate into even greater savings on borrowing costs,” adds Tracey.

Yun notes that while the Federal Reserve doesn't directly control mortgage rates, the anticipation of additional short-term interest rate cuts has pushed long-term mortgage rates down to nearly 6% in late September. This reduction could result in significant savings for borrowers – potentially up to $300 per month on a typical $300,000 mortgage compared to rates from just a few months ago.

The regional outlook for the housing market presents a mixed picture. While contract signings rose in the Midwest, South, and West, the Northeast experienced a decline. Despite this recent drop, Yun highlights that the Northeast has performed relatively better than other regions in terms of home sales and prices in recent months. The median existing-home sales price in the Northeast reached an impressive $503,200 in August, up nearly 8% year over year.

As we look to the future, there are reasons for cautious optimism. The combination of lower mortgage rates and an increase in homes being listed – up 23% in August compared to the previous year – could potentially create more opportunities for homebuyers in the coming weeks. Yun's assertion that "housing affordability will continue to see notable improvements" offers a ray of hope for those who have been patiently waiting on the sidelines.

While challenges persist in the housing market, recent developments suggest the tide may be turning. As mortgage rates continue to fluctuate and more homes become available, aspiring homeowners may find themselves closer to achieving their dreams of homeownership. The road ahead may still be bumpy, but with perseverance and strategic timing, the key to a new home could be within reach for many Americans in the near future. And that’s a very good thing.

NAR, TBWS

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