Homes Now Cheaper Than Last Year Despite Rate Hikes

Homes Now Cheaper Than Last Year Despite Rate Hikes

Even as mortgage rates climb back above 6.25%, the average home buyer today is paying less for a house than they were a year ago. This surprising trend comes as new legislation aims to curb the influence of large institutional investors in the single-family housing market.

Investor Footprint Shrinks, Mom-and-Pop Buyers Rise

Recent studies show that the impact of big investors on the housing market is actually diminishing. Investors who have bought over 350 single-family homes since 2015 now account for only 1% of all single-family purchases nationwide. This is a significant drop from a peak of 16% seen after the 2008 housing crisis.

Instead, smaller investors, those with fewer than 10 purchases, are now driving the market. These “mom and pop” investors make up over 60% of all investor purchases. Large investor activity is also highly concentrated in specific areas, with over half of all large investor purchases happening in just the top 10 metropolitan areas, like Atlanta and other Sun Belt cities. Even in Memphis, the top market for large investors, they accounted for only 4.4% of purchases over the last decade.

While some argue that limiting large investors could increase housing supply, others worry about the impact on new construction. A proposed Senate bill seeks to ban large institutional investors from buying single-family homes. However, the National Association of Homebuilders points out that a provision in the bill could force new, built-for-rent homes to be sold within a certain timeframe. This, they argue, could discourage investment in building much-needed new housing.

Mortgage Rates and Inflation Fears

The housing market is closely tied to mortgage rates, which have recently climbed back above 6%. This increase follows a brief dip below 6% in late February. While rates are lower than this time last year, they are trending upward. The average rate for a 30-year fixed mortgage is currently 6.11%, according to Freddie Mac.

Higher oil prices are fueling inflation fears. This, in turn, is making it less likely that the Federal Reserve will cut interest rates soon. These factors contribute to the rising mortgage rates.

Affordability Improves Despite Challenges

Despite the rising rates, overall affordability in the housing market is improving. The list price of homes has actually decreased by 2% year-over-year. When you factor in inflation, which is up 3%, home prices are down about 5% in real terms. This means homes are genuinely cheaper today than they were 12 months ago.

Robert Reffkin, CEO of Compass International, a large real estate brokerage, notes that while individual buyers compete with large corporations, these big players represent only about 1% of transactions. He believes that to truly increase housing inventory, it must be made easier to build homes and reduce unnecessary barriers to listing properties. Compass has partnered with Redfin to allow individual homeowners to market their homes more broadly without showing negative data like days on market or price drop history, which they believe can add 6% to 12% more inventory.

Rental Costs and Regional Differences

The cost of shelter, which includes rent, continues to rise, though at a slower pace. The latest CPI report showed shelter costs increasing by 0.2% month-over-month. This indicates that inventory shortages persist in both rental and sales markets.

Regional markets show varied trends. While many areas see prices softening, some, like San Diego, continue to experience significant price growth, with the median home price reaching over $1 million. This surge is partly driven by people relocating from more expensive areas like Los Angeles and the Bay Area. In the Bay Area, wealth generated from the Artificial Intelligence (AI) boom is fueling demand, with some buyers purchasing homes at high prices in anticipation of future IPOs for AI companies.

For those seeking more affordable options, Nashville is highlighted as a top choice. Austin, while also popular, has seen prices come down about 30% from their peak, indicating a market that is slowly recovering after a two-year pause.

What Investors Should Know

The housing market presents a mixed picture for investors and potential buyers. While rising mortgage rates and inflation concerns persist, the decrease in home prices year-over-year offers a glimmer of affordability. The proposed legislation targeting large institutional investors may have limited short-term impact given their small current market share. However, the focus on reducing barriers to new construction and improving listing processes could be key to increasing overall inventory in the long run.

Source: Homes are cheaper today than a year ago: Compass International CEO (YouTube)