President's Day Home Buying Surge

Prospective buyers made the most of the President's Day holiday last week, indulging in some window shopping, according to early data. Orphe Divounguy, a senior economist at Zillow, noted that there was a surge in showing activity, with home touring increasing by 19.4% since the beginning of the year. This upward trend suggests a promising seasonal ramp-up in the housing market.

Builders Report High Demand

Builders have also experienced a surge in demand at the start of the year. Douglas C. Yearley, Jr., the CEO of luxury home builder Toll Brothers, shared during a recent conference call that the company had seen an exceptional four weeks. As a result, Toll Brothers raised its profit forecast for the year, attributing the increase to strong demand in the market.

Challenges for House Hunters

Despite the positive market indicators, house hunters, especially first-time buyers, are still grappling with high housing costs and challenging conditions. This has been reflected in the recent decrease in mortgage applications.

However, the demand from buyers who are less sensitive to interest rates, combined with limited housing supply, is expected to drive a surge in home prices this spring. This could potentially pose challenges for the Federal Reserve down the line.

Mortgage Rates Rise, But Demand Remains Strong

Even though mortgage rates have seen a slight increase of about 0.3 percentage points since the beginning of the year, early data indicates that buyers have not been deterred by this uptick. Despite the impact of rate increases on buyer demand, the market has shown resilience and continued interest.

Low Supply and Rising Prices

The housing market continues to grapple with low inventory, leading to a notable uptick in home prices. The median sale price in January increased by 5.1% year-over-year, marking the largest jump since October 2022. Newly listed homes are now priced at just under $400,000, reflecting a 5.6% increase from the previous year.

With supply constraints persisting, home prices are expected to further accelerate. Lawrence Yun, chief economist at the National Association of Realtors, emphasized last week that the ongoing housing shortage is contributing to record-high prices in the market.

Home Price Appreciation Outpacing Wage Growth

In a surprising turn of events, January marked the first time in over a year that home price appreciation outpaced wage growth. This concerning trend serves as a stark reminder of the housing shortage plaguing America.

Potential Boost in Spring Prices

Given that home prices are typically measured from year-ago levels, we may see prices receive a boost this spring from last year’s lull. Data from the National Association of Realtors shows that prices took a hit from February through June in 2023, following a rapid cooling due to the prior year's swift rise in rates.

Impact on Federal Reserve

Although home prices do not directly factor into the consumer price index, they can indirectly push up comparable rents. A potential housing recovery indicated by rising home prices could lead to increasing housing inflation, as noted by Apollo Global Management chief economist Torsten Sløk.

Challanges for First-Time Buyers

First-time buyers are facing the brunt of the challenging market conditions, particularly due to their younger age and limited wealth. The scarcity of homes in affordable price points exacerbates the situation, especially with the recent uptick in interest rates.

Rise in Cash Buyers

Cash buyers are on the rise, with nearly a third of buyers paying entirely in cash in January—the highest share in about 10 years. This shift could be attributed to wealth generated from a record-high stock market or home equity gains, according to the Realtors association.

For more information, please contact Shaina Mishkin.