Troubling Trends In The Housing Market Amidst Rising Rates And Supply Shortages

Rising mortgage rates and challenging weather conditions are dampening home sales, yet some prospective buyers are actively exploring the market. The housing market for 2024 has encountered a turbulent beginning, marked by a significant surge in daily average mortgage rates on February 2, the largest single-day increase in over a year. This surge followed a robust January jobs report and the Federal Reserve's indication of no imminent interest rate cuts, signaling that mortgage rates are likely to remain high for the foreseeable future.

Escalating home prices are compounding the impact of rising rates, with the average monthly mortgage payment nearing October's record high by approximately $100. The median sale price in the U.S. surged by 5.4% year over year in the four weeks ending February 4, marking the largest increase in over a year. The steep rise in housing costs is pricing out many potential homebuyers, leading to an 8% decline in pending sales, the sharpest drop in four months. Harsh winter weather in early January also contributed to the decline in sales, delaying numerous homebuying transactions. Additionally, pending sales were showing improvement at this time last year when mortgage rates briefly dipped.

Nevertheless, some prospective buyers are actively engaging in the market. Redfin's Homebuyer Demand Index, which gauges requests for tours and other buying services from Redfin agents, has steadily climbed since mid-January. Furthermore, a separate measure of home tours indicates a 16% increase since the beginning of the year, surpassing last year's 10% rise during the same period. Sellers are also entering the market, with new listings up by 7% year over year.

While mortgage rates reached two-decade highs in October and November, causing home affordability to plummet to its lowest level in over a decade according to the National Association of Home Builders (NAHB), rates have since decreased to the mid-6% range. This could potentially enhance the purchasing power of median-earning Americans. However, challenges persist in the housing market, including high construction costs and a shortage of skilled workers, factors that may continue to impact home prices.

Despite a slight decrease in prices from the previous quarter, housing costs remain a significant burden for Americans, contributing over half of the recent increase in inflation, as noted by NAHB Chief Economist Robert Dietz. For buyers seeking affordability, the Midwest presents promising options, with four of the top five affordable markets located in Michigan, Indiana, and Ohio. Conversely, California remains among the least affordable markets, highlighting regional disparities in affordability.

​Experts attribute affordability challenges in the housing market primarily to inadequate supply. The U.S. currently faces a shortfall of approximately four million homes to meet demand, further exacerbating competition among buyers and driving up prices.