By Kyle Plotkin
Investment Advisor Representative
[email protected]
It’s been strange times in the housing market recently, and some of the numbers help to explain why. Mortgage rates remain high, affordability is stretched, and overall home sales have been relatively sluggish. At the same time, prices remain high, and the upper end of the market continues to show much more strength than the lower end. Why?
Interest rates are a big part of the story. Freddie Mac recently reported an average 30-year fixed mortgage rate of 6.67%. On a $400,000, 30-year mortgage, that produces a monthly principal and interest payment of about $2,573. At a 3% rate, the same loan would cost about $1,686 per month. That’s a difference of nearly $900/month just due to the interest rate alone. For a buyer who needs to finance most of the purchase price, that difference can determine whether a home is affordable at all.
The higher rates have also discouraged many existing homeowners from selling because moving could mean giving up a 3% or 4% mortgage and replacing it with a much more expensive loan. Fewer people selling homes has led to a lack of available homes in the “affordable” price range. Realtor.com recently reported that the supply of homes priced below $350,000 has improved from its 2022 low, but there are still about 300,000 fewer low-cost listings than in 2019. Because current homeowners are understandably hesitant to move and take on a new mortgage at today’s rates, inventory remains relatively low. That keeps prices high, and the cycle continues.
The high end of the market looks much different. Redfin recently reported that luxury home prices (in the top 5% of their respective market) were rising faster than non-luxury prices. Wealthier buyers are often less dependent on mortgage financing because they can make larger down payments, use equity from another property, sell investments, or pay cash. In other words, the same mortgage rate that can shut a lower-end buyer out of the market may have little effect on a wealthier purchaser.
We are seeing this specifically in the Philadelphia metro area. Recent regional data showed a median sale price reaching a record $430,000 even as overall sales through July were down about 1% from last year. The broader market is seeing more homes become available for sale, but the high-end/low-end divergence remains. Luxury homes (above $1.15 million in the Philly market) spent a median of just 6 days on the market, and 42% of those purchases were made in cash, compared with 24% overall. The bottom line is that the high-end market remains pretty active, while buyers further down the price scale are still struggling to find a home they can afford to buy at today’s financing rates.
The takeaway here is that it’s becoming less useful to talk about the “housing market” as if everyone is experiencing the same thing. At the lower end, limited inventory and high mortgage rates are squeezing potential buyers (and therefore, also sellers) out of the market. At the upper end, the ability to purchase homes in cash is insulating buyers from the interest rate problem.
We don’t know how this will shake out in the end, but interest rates will remain a major part of the story. Investors and homebuyers will continue watching the Federal Reserve, inflation, and the broader economy for clues about where borrowing costs go from here. Until rates fall, or prices and inventory adjust enough to restore affordability, these unusual market conditions may be with us for a while.