US Existing Home Sales Surge in January, Driven by Falling Mortgage Rates
Sales of existing homes in the US experienced a significant surge in January, thanks to falling mortgage rates that encouraged buyers to make their purchases. However, this surge may be short-lived if rates continue to climb after January.
According to a report from the National Association of Realtors, existing home sales, which include single-family homes, townhomes, condominiums, and co-ops, exceeded expectations by rising 3.1% in January compared to the previous month. This resulted in a seasonally adjusted annualized rate of 4 million units. However, when compared to the same period last year, sales were down by 1.7%.
Lawrence Yun, the chief economist at NAR, stated that while home sales are still considerably lower than they were a couple of years ago, January’s monthly gain is a positive sign of increased supply and demand. He attributed this growth to modestly higher listings and homebuyers taking advantage of lower mortgage rates compared to late last year.
The surge in buyers returning to the market has also led to an increase in the cost of homes. The median cost for a home rose by 5.1% from a year ago to $379,100, marking the seventh consecutive month of annualized price gains. This is particularly noteworthy as January is typically a slower month for home sales. Yun mentioned that multiple offers are becoming common for mid-priced homes, with many properties being sold within a month. He also highlighted that the elevated share of cash deals, accounting for 32% of transactions, indicates a market full of multiple offers and driven by record-high housing wealth.
After reaching a high of 7.79% last year, the average rate for a 30-year fixed-rate mortgage has dropped. Although it remained around 6.6% for over a month, recent trends suggest an upward trajectory in rates.
However, first-time homebuyers are facing steep challenges. In January, the share of first-time buyers dropped to 28%, falling below the healthy market share of 30%. Rising mortgage rates, elevated prices, and low inventory levels are contributing factors. Additionally, first-time buyers face stiff competition from cash buyers, who typically have an advantage in the market.
The share of all-cash buyers in January reached its highest level in nearly a decade, accounting for 32% of transactions. These cash offers may come from current homeowners with significant home equity who are selling their homes in expensive cities and purchasing properties with cash in more affordable areas. This puts first-time and middle-income buyers at a disadvantage when they have to rely on mortgages.
Another challenge for all homebuyers is that home prices are increasing at a faster rate than wage growth. While wage growth had been outpacing home price growth for several months, this trend reversed in January, with home prices rising by 5.1% and wage growth at 4.5%. This imbalance is a testament to the housing shortage in the US, according to Yun.
Although the inventory of homes for sale increased slightly in January, rising by 2% from December to 1.01 million units, Yun believes that a more significant increase is needed to loosen up the market. He suggests that an inventory level of 1.5 million units would be ideal.
The addition of existing homes to the inventory is currently dependent on mortgage rates. Homeowners with ultra-low rates are reluctant to sell and buy a new home during a time of higher prevailing market rates.
Yun emphasizes that while the broader employment picture drives long-term housing demand, with a robust job market pushing demand for housing, mortgage rates play a more crucial role in determining the timing of home purchases.
As the spring selling season unfolds, rising rates may cool buyer’s interest despite the boost in sales from the drop in rates during December and January. The future of the housing market will depend on how mortgage rates evolve in the coming months.