The cost of buying a new house just hit another all-time high, according to a new report. Data published by the National Association of Realtors shows the median existing U.S. home sale price jumped to $426,900 in June – a 4.1% increase from the same time last year. That marks the highest level on record and is the second straight month that prices topped a new high. As prices marched higher, sales of previously owned homes tumbled 5.4% to an annual rate of 3.89 million units. 

In a potentially good sign for buyers, however, there was an uptick in inventory last month. At the end of June, there were about 1.32 million homes for sale, according to the report, up 3.1% from the previous month and 23.4% from the same time one year ago. “We’re seeing a slow shift from a seller’s market to a buyer’s market,” said Lawrence Yun, NAR chief economist. “Homes are sitting on the market a bit longer, and sellers are receiving fewer offers. More buyers are insisting on home inspections and appraisals, and inventory is definitively rising on a national basis.

“Homes sold on average in about 22 days last month. That is down from the 24 days recorded in May but marks an increase from the 18 days in June 2023. Before the COVID-19 pandemic, homes typically sat on the market for about a month before being sold. At the current pace of sales, it would take roughly 4.1 months to exhaust the inventory of existing homes – the highest level since May 2020. Experts view a pace of six to seven months as a healthy level. “Even as the median home price reached a new record high, further large accelerations are unlikely,” Yun said. “Supply and demand dynamics are nearing a balanced market condition.”

WHY CAN’T YOU FIND A HOME FOR SALE?

There are a number of driving forces behind the affordability crisis.  Years of underbuilding fueled a shortage of homes in the country, a problem that was later exacerbated by the rapid rise in mortgage rates and expensive construction materials. Higher mortgage rates over the past three years have also created a “golden handcuff” effect in the housing market. Sellers who locked in a record-low mortgage rate of 3% or less during the pandemic began have been reluctant to sell, limiting supply further and leaving few options for eager would-be buyers.

Economists predict that mortgage rates will remain elevated for most of 2024 and that they will only begin to fall once the Federal Reserve starts cutting rates. Even then, rates are unlikely to return to the lows seen during the pandemic, with investors predicting just one or two rate reductions this year.

“Some prospective buyers are simply waiting for mortgage rates to come down after the Federal Reserve cuts rates, most likely in September,” said Lisa Sturtevant, Bright MLS chief economist. “With inflation cooling and the job market still solid, rate cuts are now almost a foregone conclusion, which means those buyers who can wait are doing so.”

Why are home sales low and home prices high?

High demand for homes and lower inventory levels have contributed to higher home prices in recent years. These expensive home prices and high mortgage rates have resulted in this housing market shift.

Matthew Walsh, economist at Moody’s Analytics, said low housing affordability and the “persistently high” mortgage rate is contributing to cooling housing activity. Unless housing becomes more affordable soon, he said he expects to continue to see lower existing home sales. The 30-year fixed mortgage rate was 6.78% as of July 25, according to Freddie Mac.

“Buyers are very responsive to mortgage rates, and with the information being so readily available and the anticipation that mortgage rates are going to come down, I think that’s keeping people on the sidelines,” said Selma Hepp, chief economist at CoreLogic.

But she said homebuyers face a double-edged sword. When mortgage rates do come down, there will be a lot of pent-up demand that will also put pressure on home prices. A rise in cash buyers could also be pushing prices higher, Hepp said. All cash buyers were 28% of home transactions in June.

“A lot of these cash buyers are actually baby boomers who maybe cashed out on their existing home. We do know that home equity is at an all-time high and if you’re moving from a very expensive home price area to a lower-priced area, you obviously will have a lot of cash,” she added.

Housing inventory is changing but is it enough?

One bright spot for homebuyers is that total housing inventory has been rising. Inventory increased 3.1% from May and was up 23.4% from a year ago according to the June existing home sales report. Walsh said some households may be deciding they can’t wait to make a life change and are moving out of homes for larger or smaller options.

“It’s a lot of households that can no longer postpone plans to sell, whether that’s because their household is expanding because they’re having children or it’s shrinking and they need to sell their larger home in the Northeast and move to a smaller home to retire in the South,” Walsh  said. “They can no longer put up with the homes that they’re in and sacrifice their low mortgage rate for a higher rate.”

Still, Hepp said the inventory is far lower than pre-pandemic levels and where demand has picked up — in Boston, New York, and Chicago, for example — there’s not a proportionate increase in the supply of housing.

Some homebuyers may be watching the Fed’s plans to cut interest rates, which affect mortgage rates, for some financial relief. A majority of economists say they believe the Fed will cut rates in September and December, according to a recent Reuters poll. Cutting rates may help bring some buyers back into the market and pump up inventory, but the effect will likely not be strong enough to bring home sales back to where they were before the pandemic, Walsh added.

What is the government doing?

The Biden administration announced a flurry of proposals this month to make housing more affordable, some of which would impact homebuyers as well as the repurposing of public lands in Nevada to bring at least 15,000 affordable rental and homeownership units to the area. In February, the White House also announced the opening of grant applications for assistance to homeowners to replace dilapidated homes.

Donald Trump, the Republican nominee for president, said at a July rally in Iowa that he would address problems in the housing market through cutting interest rates, according to Newsweek. Although presidents nominate the chair of the Fed for a four-year term, they do not have power over whether the Fed cuts rates.

States have been pursuing their own policies to improve housing inventory and affordability, including Utah and Oregon, which passed legislation to use funds for loans to developers who plan to build more affordable homes. A Maryland bill signed into law by Democratic Gov. Wes Moore in May would push property owners to make plans for vacant properties by letting cities raise taxes on those properties.

Most homeowners say they are nearly twice as willing to sell their home if their mortgage rate is 5% or higher, according to a Zillow survey. Currently, about 80% of mortgage holders have a rate below 5%.

Bottom Line

Real estate presents a promising investment opportunity. However, determining the profitability of such investments and understanding the various financing options available is vital to success in this arena. You may want to consider investing for a number of reasons, including portfolio growth, the high demand for housing, the various available financing options, cost efficiencies and passive income creation. However Investments in housing can be very tricky. Don’t venture down this road alone We live it and breath the industry. At SIMM Capital our investment strategy is to give everyone the chance to build wealth through real estate. We seek the best assets that hold the largest opportunities while delivering in rent growth year over year. We know the business. 

To see how we can help you with your Real Estate investments talk to an expert and click the link  www.simminc.com