Not only have rising mortgage rates hurt home buyers who are looking for an affordable place to live, but they have also made it less desirable for homeowners to proceed.
Think of it this way — if you have a 3% mortgage rate and sell your home for $500,000, then buy another $500,000 home at today’s mortgage rates (about 7.2% on average), your mortgage loan payment would be about $1,000 more per month. So, it’s not exactly tempting to proceed unless you absolutely have to. And you might be surprised at how much higher rates have affected the market. Technology-focused real estate brokerage Redfin has released some statistics that tell the story.
Existing home inventory is very low
Rising rates have produced a historically low level of existing homes for sale, as most homeowners have mortgage rates of 5% or less (and much less in many cases). While the number of homes on the market has ticked up slightly this year, it might surprise you to learn that there are still roughly half as many existing homes on the market today as there were in mid-2014.
As a result of low existing home inventories, more buyers are turning to new construction homes. New constructions now make up more than 30% of single-family home sales, more than double the long-term average of about 13%.
Not only is it tougher to buy a home and tougher to find a buyer after you list a home for sale, but rising mortgage rates have also made it more difficult to get a deal done. In fact, Redfin found that 53,000 home purchase contracts were canceled in September alone — that’s more than 16% of homes that went under contract. Unless it’s a cash sale, purchase contracts typically have a financing contingency, allowing buyers to back out if they can’t qualify for a mortgage.
Cash is king
As you might expect, this has become an excellent time to buy a home for people with tons of cash sitting around. Sure, home prices are higher than they were a few years ago, but homes are sitting on the market due to a lack of buyer activity, giving cash buyers a big edge.
In fact, 43% of luxury home purchases in the third quarter were paid for in cash, the highest percentage ever in a third quarter. Overall, 34% of home purchases are being made in cash, the most in nearly a decade when the mortgage industry was still thawing out in the wake of the subprime mortgage meltdown.
Is relief for buyers and sellers starting to achieve?
Many experts have been surprised at how well higher home prices held up as mortgage rates increased. But the good news is that we’re starting to see some signs that the market is thawing a bit. Maybe sellers are starting to get tired of waiting for a “good market” to sell, and perhaps buyers are starting to get used to the idea that sub-4% mortgage rates aren’t coming back anytime soon.
In late October, Redfin reported that 7% of homes listed for sale dropped their prices in the preceding four-week period, the highest share on record. Plus, a separate report found that more than one-third of home sellers are giving concessions to buyers, significantly up from two years ago when mortgages were cheap and the real estate market was in a frenzy.
We’re also finally starting to see more listing activity, as new listings increased by 6% year-over-year in November, the largest uptick in more than two years. With mortgages starting to come off the highs, the average buyer’s monthly mortgage payment was $2,575 in November, $164 below the peak in October when mortgage rates approached 8%.
In fact, although nobody has a crystal ball that can anticipate real estate market conditions (the past couple years are certainly proof of this!), Redfin has also predicted that home buyers will get a big break in 2024. It’s predicting lower mortgage rates and the appearance of more listings on the market. If this comes to pass, it could do a world of good for buyers and sellers alike.
