Art Wager
The total value of homes in the U.S. jumped 5% from a year ago to $47.5T, Redfin (NASDAQ:RDFN) said in a recent report. But how can that be if stubbornly high mortgage rates hampered housing demand?
It all comes down to supply and demand. Put simply, a shortage of homes for sale has propped up values. The supply shortage stems from homeowners’ unwillingness to list their homes on the market to avoid giving up exceptionally low mortgage rates they locked in before the Federal Reserve started hiking rates in March 2022. This dynamic is referred to as the lock-in effect, which ultimately can result in a lower housing supply, and, thus, higher prices.
During the pandemic era some four years ago, mortgage rates fell to below 3%, in a move that drove a frenzy of homebuying. Now, with the Federal Reserve holding borrowing costs at the highest level since 2001 to contain inflation, mortgage rates hovered near the 7% mark as of Feb. 22, according to a Freddie Mac survey.
“America’s homeowners are sitting pretty,” said Redfin Economics Research Lead Chen Zhao. “They’re holding a massive amount of wealth, despite lackluster demand from buyers, because home values skyrocketed during the pandemic, and now a supply shortage is preventing those values from falling.”
The average U.S. home was valued at $495,183 as of December, up from $474,740 a year before, per the report, which estimated December home values using the Redfin Estimate, MLS data and public records. The Redfin Estimate covered more than 90M residential properties.
The closely-watched S&P CoreLogic Case-Shiller Home Price Index corroborates Redfin’s (RDFN) findings. On a Y/Y basis, the HPI composite for 20 cities, not seasonally adjusted, rose 6.1% in December, exceeding the 6.0% increase expected and accelerating from the 5.4% climb in November.
“Prospective homebuyers aren’t as lucky,” Zhao added. “The combination of elevated mortgage rates, high home prices and a limited pool of homes for sale means homeownership is about as unaffordable as ever. But, should the Fed start cutting rates later this year – which is widely expected among both monetary policymakers and markets – first-time homebuyers could catch a break.
Homebuilding companies (BATS:ITB) generally responded to the housing affordability issue by cutting prices or offering mortgage rate buydowns. Sure, that translated to lower margins, but single-family homebuilders had the breathing room after achieving strong profit margins during the pandemic housing boom.
D.R. Horton (NYSE:DHI), the largest homebuilder in the U.S., last month posted fiscal Q1 earnings that fell short of the average analyst estimate, as high mortgage rates continue to weigh on the housing sector, but net sales orders advanced Y/Y.
Toll Brothers (NYSE:TOL), which last week turned in better-than-feared fiscal Q1 earnings, expects demand for new homes to remain robust in 2024, thanks to “a healthy job market, improving consumer sentiment, and continued low levels of resale inventory.”
Fitch Ratings predicts 2024 will be a turning point for home prices. Citing modest improvements in new home sales and inventory, “there are signs of a gradual thawing in the U.S. housing market,” the credit ratings agency said in a Friday report. As such, it sees nominal national home prices decelerating 0%-3% this year from 5.5% in 2023.
If that pans out, keep an eye on real estate brokerages, who should benefit from the increase in transactions. Other publicly traded real estate broker stocks include: Anywhere Real Estate (HOUS), Re/Max (RMAX), Zillow (Z) (ZG), eXp World Holdings (EXPI), and Compass Inc. (COMP).
