The housing market conundrum (somewhat) explained

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Published Date 10/6/2023

A contradiction is defined as “a combination of statements, ideas, or features of a situation that are opposed to one another.” Applying it to today's housing market, therefore, is appropriate.

Realtor.com’s Clare Trapasso puts it this way: “Lately, the housing market just seems to defy logic. Mortgage rates refuse to come back down, contrary to the predictions of experts. Home prices continue to rise despite those high rates. And all of those forecasts of more homes coming on the market? In more than three years, it simply hasn’t happened.” So she asks — what is going on in this contradiction-riddled housing market?

She goes on to say that common sense would suggest that the combo of high home prices and mortgage rates would have cooled off by now — because what goes up must come down. Right? The thing is, many other factors are deftly at work keeping both prices and mortgage rates high—and homebuyers frustrated.

Realtor.com Chief Economist Danielle Hale explains, “The best illustration of how unexpected this housing market is in 2023 is to look at the forecasts of what people thought would happen and what actually happened,” says. “There’s not quite as much momentum in the housing market as we’d thought.”

Prognosticators are, of course, alive and well, hoping their predictions result in a few “I told you so” moments—until the market does the next unexpected thing and those predictions are scrapped and revised yet again.

Patience may be a virtue in some circumstances, but it’s unclear that it’s paying off for homebuyers waiting out the market. Plenty of prominent real estate professionals predicted that high mortgage rates would force prices to dip. There’s a limit to how much buyers can afford, after all.

While median list prices tumbled a bit in some of the markets where they had risen the most during the COVID-19 pandemic, such as Austin, TX, and Miami, nationally, prices flattened out, dipping just slightly before going right back up again.

In fact, Trapasso reports that prices are now surging in some of the traditionally more affordable parts of the country, including the Rust Belt and Midwest. “The phenomenon is due to buyers priced out of more expensive areas now chasing affordability wherever they can still find it. This is, ironically, driving prices up in these areas.”

Trapasso also reminds us that historically, high prices and high rates aren’t as odd of a combination as they may seem. Increases in mortgage rates have been associated with small price increases in the past, says Laurie Goodman, a fellow at the Urban Institute, a think tank. High rates often signal a thriving economy, which is why the Feds have been raising rates to get inflation under control. When the economy is robust, more folks are in a position where they are likely to want to buy homes. That extra competition can nudge prices up.

“During periods of high rates, you have less buyers and less sellers,” says Goodman. “But there are enough people who can afford to buy. [And] home prices aren’t going down because the economy is strong.”

Small comfort, since, it’s the number of home sales numbers that fall. Sales of existing homes, which excludes new construction, dropped 16.6% year over year in July —the most recent month data was available from the National Association of Realtors. As the market freezes up the number of transactions drops dramatically.

So what about those mortgage rates? “Here is where it gets technical,” says Trapasso. “Rates could be a full percentage point lower than they are today due to something called the spread between mortgage rates and 10-year U.S. Treasury bonds. The spread is larger than normal, which suggests there is room for mortgage rates to come down.” She goes on to say that higher mortgage rates reflect the uncertainty around interest rates the Fed controls and what the future of the economy is.

If you’re still following along here, Trapasso says you also need to factor in what’s going on in the secondary mortgage market—a head-spinning set of circumstances that are also pushing up mortgage rates. “For one, lenders rarely hold onto a mortgage loan once it’s made because they want to free up cash to make new loans. So mortgages are typically bundled together into mortgage securities, better known as mortgage bonds, and sold to investors in the secondary market. When bond prices are lower, mortgage rates go up to entice investors to purchase them.”

And lastly, this whole thing sounds like a self-fulfilling prophecy. Investors worry that the Fed may jack up its rates again—which is also likely to result in higher mortgage rates and want to be compensated for the length of these potentially shorter loans as well as the general uncertainty of the housing market.

The only bright spot in all this shows up in new home sales. Builders are more successful now because they’re “buying down” mortgage rates —some at significant savings to buyers. Many are also lowering their list prices and contributing to buyers’ closing costs as well.

While new homes have historically been more expensive than existing ones, this gap has narrowed, with new homes costing a median of $436, 700 in July compared with $406,700 for a home on the resale market.

As for sellers, experts are calling the months ahead a “mortgage winter,” with people frozen in place as long as they don’t have to move. Why list your home and sell only to find a market where rates are now double what they had? When all this begins to change, however, you can expect much revelry and popping of corks. Because it will feel as if the housing market is emerging from a long, long tunnel and breaking into the sunlight at last.

Realtor, TBWS

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