As the summer begins to wind down, so too does the home-buying season. And what an interesting season it’s been to be a realtor. With 30-year mortgage rates above 7% for the first time since 2001, the market for existing home sales has effectively fallen out from underneath itself.
But don’t let that statistic make you think home prices are falling along with it. In fact, the demand for homes remains incredibly robust for a variety of reasons. Reading through the housing market tea leaves to the consumer, even though mortgage rates are high, we still believe consumers are largely benefiting from the current housing market environment.
Existing Homeowner Mortgage Rates
First, let’s look at existing homeowners. According to Goldman Sachs, 99% of borrowers have a mortgage rate lower than 6%. Of those, 28% are locked in rates at or below 3% and 72% are locked in rates at or below 4%. This means most Americans are not presently contending with higher mortgage rates because they were able to lock in their rate prior to rates increasing in 2023.
Additionally, homeowners who have held a home for the last decade have seen their home price increase an average of $190,000 during this time. In fact, over the past decade, there have been very few months where home prices have fallen as seen in the chart below. On average, home prices have increased 0.59% every month going back to 2014.
The reason this matters for the consumer is because home valuations are a significantly larger proportion of a consumer’s net worth than any other asset they own. According to the Federal Reserve, the bottom 90% of households (based on household net worth) own 55% of the housing market.
This is in stark contrast to the top 10% of households owning 90% of the stock market. Consumer sentiment can be a leading indicator of economic health, and having the largest asset within your household appreciating is likely to help support consumer spending habits.
Do Higher Mortgage Rates Impact Home Supply?
Pivoting back to the current rate environment, there’s no doubt higher mortgage rates are having an impact on existing home supply. Unless you’re forced to move for family or a job, most Americans are unlikely to part with a sub-4% mortgage rate when current rates are above 7%.
This has caused a substantial drop in existing home sales throughout 2023. Some prognosticators have viewed this nefariously as a sign that home prices are about to fall due to the drop in home sales, although we believe this doesn’t take into account the full picture.
How is the U.S. Housing Market Right Now?
U.S. demand remains strong when considering new and existing home sales. The chart below shows a strong correlation between these two metrics dating back ten years. However, since the beginning of 2023 when mortgage rates began to skyrocket, this relationship breaks down.
New home sales begin to pick up steam while existing home sales plummet. We believe this shows continued demand for homes in the U.S. In our opinion, the reason why existing home sales are slowing has more to do with homeowners who are unwilling to give up their low mortgage rates vs. a lack of demand for homes.
The consumer has remained more resilient than most had thought at this time last year. Part of this resiliency has to do with a stable housing market. There’s no doubt the consumer still has some hurdles to face in the coming months and years as student loan payments restart and household savings continue to decline. We’re continuing to keep a close eye on the consumer as a barometer of economic health rolling into 2024.
How do rising interest rates affect your retirement?
If you have questions about how to protect your retirement savings from rising rates or if you would like a second opinion, please schedule a Complimentary Financial Review with our team.
