The bar remains high for typical homebuyers

Typical homebuyers

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Credit Sesame on the challenges faced by typical homebuyers.

Several trends in the housing market point to slower activity. Is this the break would-be home buyers have been looking for?

Previously, purchase demand had been so hot and heavy that prices soared. With that demand finally slowing down, does that mean home prices are becoming more reasonable?

Unfortunately, the supply-and-demand relationship in the housing market isn’t that simple. Bargains remain hard to come by, so buyers need to pick their spots.

Slowing demand hasn’t brought prices down

There are clear signs that the housing market has cooled off recently. However, this has yet to have a meaningful impact on housing affordability for typical homebuyers.

Signs of slowing demand

The Mortgage Bankers Association (MBA) reported that applications for home purchase loans as of the end of September were running 27% below the volume a year earlier. The slower mortgage activity mirrors the recent pattern in completed home sales. 

According to the National Association of Realtors (NAR), home sales stayed at an annual pace of over 6 million units from late 2020 through early 2022. They’ve since fallen off sharply.

After peaking at over 6.5 million per year, the pace of home sales has since fallen to just over 4 million. That’s a decline of around 38%. 

Little impact on affordability

So far, the impact of slowing demand on home prices has been less dramatic than you might think. In fact, home prices have risen in recent months despite falling volume.

Figures from the NAR show that the median price for sales of existing homes rose sharply during the pandemic, peaking at $413,800 in mid-2022. After falling for a while late last year, they’ve since rallied. The median sale price for an existing home is now less than 2% below the peak and 48% higher than at the end of 2019. In other words, the steep drop in demand has done little to cool off home prices. 

For most buyers, prices are only part of the problem. 30-year mortgage rates are now about 4.5% more than at the end of 2020. 

Mortgage rates were starting to ease late last year and early in 2023. Unfortunately, that has reversed in recent months.

30-year mortgage rates have been climbing since the end of February. They reached 7.19% in late September – their highest level in over two decades.

In short, home prices rose sharply and remain relatively close to their peak. Mortgage rates have soared and show little sign of returning to their former levels. 

Of course, most home buyers have to borrow to afford a home. So, the combination of sharply higher home values and mortgage rates leaves many typical buyers priced out of the market. 

Other supply and demand factors are keeping prices high

Though there are signs of less demand for housing this year, some other factors may be blunting the impact of that slowing demand on prices. 

In recent years, ordinary home buyers have had to compete with a flood of money from professional investors buying residential properties. NAR figures show this represents about 16% of sales – a significant incremental demand above and beyond normal home-buying activity.

Beyond this additional source of demand, there’s the fact that the supply of houses remains somewhat limited. Higher mortgage rates have made many existing homeowners reluctant to sell because that would mean effectively trading their current low-interest mortgage for one at a much higher rate if they buy a new home.

As a result, even with sales volume slowing, the supply of homes for sale remains tight. That tight supply helps keep prices elevated and recently has been pushing them even higher. 

Tighter credit standards could add an obstacle

Besides higher prices and interest rates, what else could go wrong for ordinary home buyers?

Tighter lending standards are another potential obstacle. Consumer debt levels are at an all-time high. Late payments and defaults are rising.

Understandably, those conditions make lenders wary. Many have tightened their lending standards. This year’s banking problems only add to this atmosphere of caution. 

This means loans may become more expensive and more challenging to secure for all but the most qualified buyers. 

Meeting the challenge

What is a would-be home buyer to do in this situation? It’s a challenging market, but there are some things you can do to make the best of it:

  • Save up for a bigger down payment. You may benefit from waiting for mortgage rates to come down anyway. So, use the time to build a bigger down payment. This will help you qualify for a loan and lower your borrowing costs.
  • Work on your credit. While waiting for the right opportunity, do what you can to improve your credit score. 
  • Remember that conditions vary greatly by region. For example, sales generally have declined more in the Northeast than other regions while generally held up better in the South. That means there may be more bargains in some markets than in others.
  • Keep a close eye on the market. Opportunities can come up quickly and unexpectedly. Don’t rush into anything; be prepared to strike when the right opportunity comes.

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Disclaimer: The article and information provided here is for informational purposes only and is not intended as a substitute for professional advice.

Richard Barrington
Financial analyst for Credit Sesame, Richard Barrington earned his Chartered Financial Analyst designation and worked for over thirty years in the financial industry. He graduated from St. John Fisher College and joined Manning & Napier Advisors. He worked his way up to become head of marketing and client service, an owner of the firm and a member of its governing executive committee. He left the investment business in 2006 to become a financial analyst and commentator with a focus on the impact of the economy on personal finances. In that role he has appeared on Fox Business News and NPR, and has been quoted by the Wall Street Journal, the New York Times, USA Today, CNBC and many other publications.

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