Why the Housing Market Will Remain Muted This Year Given Higher Mortgage Rates (Video)

Increased Inventory Yet Still Below Historical Average

The current housing market has seen a slight increase in inventory, with 1.5 million single-family homes available. This marks a 15% year-over-year increase but remains 1.5 standard deviations below the historical average, indicating that inventory is still very low. The market sentiment remains negative due to this shortage.

Impact of Higher Construction Costs

New construction costs have risen by 5% year-over-year, further complicating the market dynamics for buyers and sellers. Buyers are hesitant to enter the market due to higher costs, while sellers are reluctant to sell homes where they have secured lower mortgage rates, ranging from 2% to 3%.

Mortgage Rates and Federal Reserve Influence

The Federal Reserve’s decision to maintain steady interest rates, with the possibility of a cut later in the year, has not significantly shifted buyer and seller sentiment. Despite a strong economy, stock market, and labor market, the doubling of mortgage rates has slowed consumer activity in the housing market. Many homeowners, about 77%, have mortgage rates below 5%, making it difficult for them to transition to higher rates.

Market Sentiment and Consumer Behavior

Consumer sentiment remains decent despite high mortgage rates, but there is a cautious approach towards entering the market. Potential buyers are waiting for rates to potentially decrease, impacting their willingness to make offers and buy properties.

Public Builders Gaining Market Share

Public builders have been gaining market share, growing five points above the market last year. Reports from major builders like Lennar and KB Home are expected to show strong performance, although uncertainty in the market may lead to cautious outlooks, potentially affecting stock performance this earnings season.

Immigration’s Dual Impact on the Housing Market

Increased immigration is anticipated to have a dual impact: it brings more potential buyers into the market and alleviates the labor shortages that have plagued the housing market for the past eight years. Both factors are expected to influence the housing market positively.

Key Housing Data Points

Housing starts indicate the volume of new construction coming to the market, while existing home sales remain low. Both metrics are critical in assessing the health of the housing market. The cyclical nature of the housing market and its emotional impact on consumers add to the complexity of making precise predictions.


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