The Spring Housing Market: Pricing and Competition

The Spring Housing Market: Pricing and Competition

The Spring housing market has defied all expectations by not cooling down and easing competition despite higher mortgage rates. Usually, higher mortgage rates lead to a decrease in both prices and demand, as seen in previous years, but this year has proved to be an exception. The main reason for this anomaly is the lack of available homes for sale in the market. Current homeowners are finding it increasingly difficult to afford to move, which is ultimately resulting in keeping prices high.

In February, home prices experienced a 5.5% increase compared to the same month in the previous year. While this annual comparison is slightly decreasing, the price gain from January to February was almost double the usual rate for this time of year. This indicates that the Spring market for this year started off significantly strong despite the higher interest rates.

The average rate for a 30-year fixed mortgage reached its highest point in October, briefly surpassing 8%. Although it dropped back into the 6% range for a while, it rose above 7% in February. Instead of cooling down the market, both sales of newly built homes and pending sales of existing homes remained relatively high during this time.

Supply Challenges

One of the major challenges facing the existing home market today is the lack of supply. While there are more new listings this Spring compared to the previous year, the supply is still 40% lower than it was before the pandemic. This shortage is mainly due to a lock-in effect that current homeowners are facing. The cost of moving up to a more expensive home has become so high that many homeowners are choosing to stay put and not list their homes for sale.

Data from ICE Mortgage Technology shows that before the Federal Reserve started raising rates in 2022, upgrading to a home that was 25% more expensive would only increase the average homeowner’s monthly payment by 40%. However, in today’s market, due to the near record-low mortgage rates, moving up to a 25% more expensive home could result in a 132% increase in the monthly payment.

According to Andy Walden, ICE’s vice president of enterprise research, a reduction in rates could potentially ease the situation for many buyers. If rates were to drop to 6%, the monthly payment increase when moving to a more expensive home would decrease from an average jump of 103% to 88%. While rates at 5% would still lead to a 68% larger payment increase, it might be enough to motivate some individuals with a strong desire to upgrade.

Recent data from Zillow reveals that the U.S. currently has a record-high of 550 “million-dollar” cities, where the typical home is worth $1 million or more. This marks an increase of 59 more million-dollar cities compared to the previous year. The rise in home values is attributed to the high and continuously increasing prices combined with the lack of available homes due to various factors such as the lock-in effect and reluctance to move.

The Spring housing market for this year has proven to be anything but conventional. Despite higher mortgage rates, prices remain high, and competition continues to be fierce due to the scarcity of available homes for sale. The lock-in effect faced by current homeowners, along with the significant payment increases associated with moving to more expensive homes, pose significant challenges to both inventory and affordability in the housing market. While a reduction in rates could potentially alleviate some of these issues, the fundamental mismatch between supply and demand remains a major obstacle that needs to be addressed in order to achieve balance in the marketplace.


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