There is no doubt that rising rates are having an impact on housing demand. As rates rise, payments go up and therefore homes become less affordable. In commercial markets, the building or project price usually follows lower. Whereas, the residential market frequently marches to the beat of a different drum, as is the case right now.
Two things about these phenomena are worth examining. First, why the disconnect exists and second, if the same effect is happening equally across the entire spectrum.
First, why does the disconnect exist? Millennials are buying their first homes, and there’s a lot of Millennials out there. This type of displacement has happened before, in the 70’s when those Boomers were buying their first homes. As the Wall Street Journal points out: “It isn’t as if the housing market hasn’t weathered a significant increase in rates before. In the 1970s mortgage rates doubled. And yet, over the decade ended in 1979, the number of total homes rose by 25%—then the result of a boomer push for homeownership.”
As can be expected, this large group of Millennial buyers creates some disparities. In February 2022, we wrote about this, in this very publication. We pointed out that prices were rising fastest among the lower priced homes. However, now we see those rates rising, and homes becoming less affordable; so cold water is thrown on everything, right?
Looking at the data from the National Association of Realtors shows that this is not actually the case. Average 30-year mortgage rates started climbing at the beginning of the year. When existing home sales for February 2022 were announced on March 18, sales were down 7.2% and a view at pending home sales showed that the cooling seems to be continuing. Those sales are broken down in a number of different ways, and we can get a better overall picture of these trends by looking at the sales statistics by size.
So, indeed sales slowed significantly, but only at the low-end of the market, among homes in the $0-100K and $100-250K range. Among those homes that are below the average price, representing about one third of the market, sales were off almost 25%.
Looking even deeper reveals that those homes have not been in demand for some time and are not subject to the supply constraints that hamper the homes that are in demand in the higher range. In fact, as the NAR points out: "Pending transactions diminished in February mainly due to the low number of homes for sale," said Lawrence Yun, NAR's chief economist. "Buyer demand is still intense, but it's as simple as ‘one cannot buy what is not for sale.’”
Looking at the homes below the median price, supply is not an issue, with homes below $100,000 in fact sitting on the market twice as long as homes that are over a million dollars. And the homes that are most subject to supply constraint seem to be the median priced homes, which is consistent with the first-time buyer push.
Bottomline, it’s not so much that there aren’t enough homes, per se, it’s that much of the current housing stock is just not desired in this market. Part of that is location, certainly, and another part is the size and features in these homes. The mid and upper-end of the housing markets are very different from the low-end, with buyers in those upper-brackets having good income growth and strong savings. Indeed, it appears we have a two-tiered market, with the dramatic headlines heralding a housing crash being driven by what is happening at the low-end, while the mid and high-end markets seem well protected at this time.