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Scales tip toward rentals over buying heading into 2024

Scales tip toward rentals over buying
by Brad Cartier, posted in Newsletter

Fannie Mae released a market update last week, highlighting that the likeliest scenario for the economy is a mild recession as inflation and the labor market cools. Doug Duncan, Chief Economist at Fannie Mae notes:

“In April 2022 we noted our expectation that the combination of dissipating stimulus impact and tightening monetary policy would result in a mild recession in the second half of 2023; mild in part because we expected the housing supply shortage to keep production from falling significantly.”

Further, Duncan notes that the hotter-than-usual resale and new home markets are evidence of the ongoing supply problem, putting upward pressure on overall housing prices.

Duncan then joined Housing Wire to provide a market update last week, outlining that interest rates will remain elevated and that there’s a good chance a rate hike is coming before the end of the year. According to Duncan, rate drops will begin in Q2 2024, and before then, we will see a mild recession.

“If rates stay at the 7.25% level, it’s going to be worse, not better. On the production side, the mortgage business is in recession because the levels of existing-home sales are back where they were at the end of the great financial crisis at around 4 million units. That’s very low historically. I don’t see how it can go much lower than that.”

Melissa Dittmann Tracey of the National Association of Realtors (NAR) also commented last week on rates, noting that despite the rate pause, it isn’t enough to push rates lower and will still cause strain among borrowers and lenders. Commercial real estate in particular is facing a crisis due to rising rates, which will disproportionately affect smaller and community banks due to their higher exposure to this asset class.

NAR Chief Economist Lawrence Yun notes that housing production needs to double its current level to moderate ongoing housing price increases. There just isn’t enough supply, with unsold inventory sitting at 3.3 months; often, a 5-6 month pace reflects a more balanced market. Further, 72% of homes sold in August were on the market for less than a month, highlighting the tight resale market.

Mortgage Bankers Association (MBA) chief economist Mike Fratantoni reacts to the current market conditions and is quoted in MPA Magazine highlighting the supply-side issues we are experiencing in the housing market.

“The lack of housing inventory continues to be the biggest challenge for many potential buyers.  While homebuilder sentiment is clearly impacted by the recent surge in mortgage rates, permits for single-family homes provide a positive outlook for the pace of construction in the year ahead. If mortgage rates trend down in 2024 as we anticipate, the combination of more homes for sale and somewhat lower rates should support stronger purchase volume.”

Home sales

Danielle Hale of released existing home sales data last week, further pointing to a tightening housing supply. Year-over-year home sales declined 15.3%, with home prices making a surprising jump in August, reaching $407,100 (up 3.9% YoY).

Sales down

Source: (September 2023)

Hale states, “[t]hese challenges may tip the already-tilted scales for potential first-time homebuyers further toward renting. Rising homebuying costs and falling rents have already tipped the monthly rent vs. buy tradeoff in favor of renting in the overwhelming majority of the 50 largest metropolitan areas.”

Diana Olick of CNBC highlights the low supply of resale homes, noting that the weakest end of the housing market is the lower-end homes. This shows the complete lack of starter homes and continues to pressure housing affordability as lower-priced homes disappear from the market.

Fan Yu-Kuo of the National Association of Home Builders (NAHB) reports that existing home sales hit a 7-month low in August. “Low resale inventory and strong demand continued to drive up existing home prices, marking the third consecutive month where the median sales prices exceeded $400,000.”

Dana Anderson of Redfin joins the conversation, highlighting that their data shows a 13% decline in YoY pending sales, continuing the downward trend of resale housing supply. This is keeping upward pressure on housing prices.

Pending sales down

Source: Redfin (September 2023)

That said, we may see some potential opportunistic sellers come online due to the rising prices.

“A few more home sellers have jumped off the sidelines. New listings have stabilized, ticking up slightly since the beginning of September. They’re down 7% from a year earlier, but that’s the smallest decline since July 2022 (though it’s worth noting that new listings were falling rapidly at this time last year). It’s possible that some homeowners are taking advantage of rising home prices and low inventory, counting on being one of the only homes for sale in their neighborhood.”

#LocalNews released its annual report on the best time to buy a home, and the national average sat at October 1-7. It is estimated that this period will have higher active listings and fewer buyers, meaning the buying opportunity will be optimal. Locally, these ranges change; here are some metro-level highlights on the best week to purchase a home:

  • New York-Newark-Jersey City, NY-NJ-PA: Sept 10-16
  • Philadelphia-Camden-Wilmington, PA-NJ-DE-MD: Sept 10-16
  • Miami-Fort Lauderdale-Pompano Beach, FL: Jan 8-14
  • Atlanta-Sandy Springs-Alpharetta, GA: Oct 8-14
  • Boston-Cambridge-Newton, MA-NH: Sept 10-16
  • Phoenix-Mesa-Chandler, AZ: Nov 5-11
  • San Francisco-Oakland-Berkeley, CA: Oct 8-14
  • Detroit-Warren-Dearborn, MI: Oct 8-14

Dana Anderson of Redfin reports on median home sale prices in the U.S., highlighting the metros with the highest and lowest gains year-over-year in September:

  • Miami (+14.4%)
  • San Diego (+11.5%)
  • Anaheim, CA (+11.1%)
  • Newark, NJ (+11%)
  • New Brunswick, NJ (+9.8%)
  • Austin, TX (-4.5%)
  • Fort Worth, TX (-2.2%)
  • Phoenix (-1.7%)
  • San Antonio, TX (-1.6%)
  • Portland, OR (-1.2%)

Jaclyn DeJohn of SmartAsset reported earlier this month on the best cities for first-time homebuyers based on affordability, growth potential, competition, and demographics. The top 3 markets were found in Texas.

First time homebuyer markets

Source: SmartAsset (September 2023)

Some other key findings:

  • The Killeen, Wichita Falls, and McAllen areas offer the best combination of affordability, housing inventory, growth potential, and relaxed competition across the study. 
  • Illinois has some of the most affordable housing markets. 
  • Home values in Southern areas like Tennessee (Knoxville, Johnson City), Georgia (Athens, Savannah), and North Carolina (Wilmington, Winston-Salem, Greenville) are expected to go up from 8.2% to 9.8% by July 2024.
  • California, Oregon, and Massachusetts have some of the worst markets for first-time homebuyers.
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