As the summer comes to a close and a new school year begins, we felt like it was a good time to offer our musings on the most influential factors affecting our current market. While the market is always nuanced, we'd like to highlight a few of the positive developments, as well as a few negatives, and, of course, close with our opinion of the market’s direction.
Americans, unprecedentedly, are sitting on massive amounts of equity in their homes. In the first quarter of 2023, equity rose 20% reaching a total of nearly $30 Trillion. The average American now has around $300,000 in equity in their home. As seen on the graph below, 39% of homes are owned free and clear, 29% of mortgaged homes have more than 50% equity, and 32% of homes with mortgages hold less than 50% equity. These are staggering numbers that allude to higher purchasing power for homeowners looking to leverage their equity into their next home.
With all this equity in their homes, people are still sitting on the sidelines waiting for things to change. Affordability has become the real monkey wrench in the market. Simply put, the rising interest rates are deteriorating affordability. Whether the higher interest rates are too much to take on, or giving up your ‘pandemic rates’ seems foolish, buyers have been reticent to enter the market despite their wants and needs. Couple these scenarios and you get buyers who feel locked out of the market, preventing them from accessing their equity and selling their homes.
Despite the increased equity, the lack of affordability has hurt demand from buyers, but not at the same pace that inventory has eroded. Lack of inventory has been the greatest challenge to our market hands down. If people don’t buy a new home, they aren’t going to sell their old one. Even areas that typically see new homes being built are struggling, and this has ripple effects on all parts of the market. Lower priced new homes are struggling the most, as the cost of construction makes it particularly hard to build at affordable prices. On the flip side, high construction costs have discouraged homeowners from additions and renovations. If nothing changes, those costs increases will push people back into the market eventually. However, even while inventory and buyer demand remain low, multiple offers are still prevalent.
With all of this growing equity, homeowners are aware of their increased purchasing power, though, they are tentative to use it given the higher cost of a mortgage and lack of inventory. What we see is a market that is stymied by these two factors, but is ready to blow based on increased wealth and pent up demand of buyers who've felt locked-in by their low interest rates. What is going to give? Our guess is that low inventory won’t turn around sooner than interest rates come down. Once interest rates do drop, there will be a flood of buyers and the level of competition will rise steeply. This is why we've been advising buyers these days to buy now while competition is slightly lower, and plan to refinance when the rates come down. The days of 7+ offers seem to have passed, but we fully expect it will come back when rates ease. After all, it is much easier to win a multiple offer scenario when there are less offers.