The spring housing market has defied expectations by not cooling down despite higher mortgage rates. Typically, higher rates lead to a decrease in both prices and demand, but that is not the case at the moment. The current situation is a result of the shortage of homes for sale, as existing homeowners are unable to afford moving, thus keeping prices at a high level. Home prices in February showed a 5.5% increase compared to the previous year, according to CoreLogic.
One of the major challenges in the existing home market today is the lack of supply. Although there are more new listings this spring compared to last year, the overall supply is still 40% lower than pre-pandemic levels. The reluctance of current homeowners to list their properties for sale can be attributed to the high cost associated with moving up. For instance, the average homeowner with a low mortgage rate would see a 132% increase in their monthly payment to upgrade to a 25% more expensive home.
The lock-in effect is a significant factor contributing to the limited housing inventory. Historically, upgrading to a more expensive home would result in a manageable increase in the average homeowner's monthly payment. However, with the current record-low mortgage rates, the cost of moving up has significantly spiked, making it financially unfeasible for many homeowners.
The impact of moving to a more expensive home varies across different markets. For example, in Buffalo, New York, upgrading could lead to a $604 increase in monthly payments, while in San Jose, California, the increase could be as high as $4,517. The disparities in regional housing markets highlight the challenges faced by both buyers and sellers in different parts of the country.
Lower interest rates could potentially alleviate the financial burden for homeowners looking to move. According to ICE's vice president of enterprise research, Andy Walden, reducing rates to 6% would result in a more reasonable increase in monthly payments for trading up to a more expensive home. However, until the fundamental mismatch between supply and demand is addressed, the housing market will continue to face pressure on both inventory and affordability.
A recent report from Zillow revealed that the U.S. now has a record-high of 550 “million-dollar” cities, where the typical home is valued at $1 million or more. This surge in million-dollar cities is indicative of the rising home prices, which have been fueled by various factors, including the shortage of inventory and the impact of low mortgage rates.
The spring housing market has proven to be resilient in the face of higher mortgage rates and limited inventory. The challenges posed by the lock-in effect, regional disparities, and record-high home values underscore the complexities of the current housing landscape. As the market continues to evolve, addressing the fundamental issues of supply and demand will be crucial in ensuring long-term sustainability and affordability in the housing sector.