Home Buyers Tiptoe Into a Tough Market

"The lowest mortgage rates since the summer are starting to lure frustrated home shoppers back to the market. The problem is that few homeowners who have locked in much lower rates appear ready to sell.

Home sales this year are on track to be the lowest since at least 2011. But as mortgage rates retreated from nearly 8% in October to below 7% last week, buyers are responding. Mortgage applications have increased for six straight weeks on a seasonally adjusted basis, though they are still down from year-ago levels, according to the Mortgage Bankers Association.

Real-estate agents say they expect more buying activity in the new year, after home shoppers return from a break over the holidays.

"There's just a lot of pent-up demand," said Lisa Sturtevant, chief economist at Bright MLS, a real-estate listings database that covers parts of six eastern states and Washington, D.C. "There's a lot of people out there who are still waiting to get into the market, and they're making it work however they can."

Home-buying affordability, which hit the worst level in decades this fall, is improving. 

The typical housing payment for a buyer purchasing a median-priced home with a 20% down payment was $2,503 in the four weeks ended Dec. 10, the lowest level since April, according to real-estate brokerage Redfin.

That buying appetite is poised to grow further owing to the recent retreat in mortgage rates. According to Freddie Mac, the average rate on a 30-year fixed mortgage has declined for seven straight weeks, falling to 6.95% as of Dec. 14 after hitting a two-decade high of 7.79% in October.

The most significant constraint is the shortage of homes on the market. Many homeowners who locked in low mortgage rates in recent years are unwilling to give up those loans to take on a different mortgage at a significantly higher cost.

After a boom in home purchases and refinancings when rates were near a bottom, more than 32 million homeowners have mortgage rates below 4%, according to Intercontinental Exchange.

New for-sale listings are going up, but slowly. In November, they rose 7.5% from a year earlier, but the active inventory of homes for sale was almost 38% below typical prepandemic levels, according to Realtor.com. (News Corp, parent of the Journal, operates Realtor.com.)

Homeowners' unwillingness to sell their homes because they don't want to let go of their low mortgage rates is keeping home prices near record highs. Mortgage rates would need to fall another percentage point or more to entice many homeowners to sell, economists and real-estate agents say.

The current dichotomy between more buyers who see mortgage rates as attractive enough to transact and homeowners who still consider them too steep to sell is likely to keep the housing market from really taking off.

A combination of low inventory, high prices and high mortgage rates has stifled the housing market this year. Existing-home sales slumped in October to the lowest rate since August 2010, according to the National Association of Realtors.

In a sign of how much consumer expectations have changed, a mortgage rate near 7% is now attracting buyers, while a 7% mortgage rate in late 2022 led to a sharp drop in sales activity.

Carly and Vincent Bove have been trying to buy a home in New Jersey since the summer of 2022 and have made about 15 offers on homes. The couple is expecting their first child this spring.

The listings they see on the market are typically estate sales or homes owned by sellers who are moving to another state, Carly Bove said. When they do find homes that appeal to them, they often face bidding wars, she said.

While the recent decline in rates could make a purchase more affordable, she doesn't expect it to lure more sellers onto the market.

"It just feels like a desert. There is nothing there for us to even look at," she said. "We are saving money and we're ready to spend it, but we have nothing that meets our criteria to spend it on."

When rates declined in early 2023 after rising above 7% the prior fall, activity surged as buyers rushed to take advantage. Existing-home sales jumped almost 14% in February from January, the first monthly increase in a year, according to NAR.

Market participants expect another pickup in sales in early 2024. Interest from buyers typically increases in the first quarter, said Anthony Aldridge, executive director of sales at Service First Mortgage in Fort Worth, Texas.

"If we're met with lower interest rates in that seasonally strong period, it should be a great start to the year," he said.

Aldridge said he expects the most activity from first-time home buyers who aren't locked into an existing mortgage and are frustrated with high rent costs.

Some housing economists are forecasting that mortgage rates could continue to slowly decline in 2024. The housing-market slowdown since early 2022 is one of the biggest effects of the Federal Reserve's efforts to curb inflation and cool the economy by raising its benchmark interest rate. Last week, the Fed kept its benchmark rate steady at a 22-year high and released new projections showing Fed officials anticipated three rate cuts next year.

Some market watchers also expect inventory to creep higher next year, because would-be sellers might not be able to keep waiting for lower rates.

"I can't imagine that we would go much lower in terms of existing inventory," said Christine Cooper, chief U.S. economist at CoStar Group. "There's got to be a number, a percentage of homeowners, that do have to move. They've inherited a house, for example, or they have a job change."

The sellers who are listing their homes right now are typically people who are relocating for job opportunities, empty-nesters who are downsizing, investors, or families who are moving into multigenerational homes to share costs, said Juan Castro, a real-estate agent at Redfin in Orlando.

Other types of sellers are still staying put, he said. That includes move-up sellers, many of whom are holding on to starter homes that would appeal to first-time home buyers.

"You're not going to see people sell a small house to move into a big house. . .It's too much of a payment shock," Castro said. "You'll see inventory go up a little bit, but it will not be like it was four years ago."" [1]

1. Home Buyers Tiptoe Into a Tough Market. Friedman, Nicole.  Wall Street Journal, Eastern edition; New York, N.Y.. 18 Dec 2023: A.1.