Double Whammy for Homebuyers: Prices Near Peak, Rates at Yearly High
Double Whammy for Home Buyers
The housing market remains challenging for buyers in 2024, with rising home prices and higher mortgage rates making monthly payments increasingly unaffordable. According to the latest data, the median home sales price is just shy of the 2022 record driven by pandemic buying. At the same time, the 30-year fixed mortgage rate has jumped to its highest level this year.
Concurrent increases in home prices and mortgage rates happen, though it's not the norm. Economic growth can drive both up: a strong job market fuels demand (raising prices) and the Fed might raise rates to cool inflation (increasing borrowing costs). However, rapid rate hikes typically slow price appreciation, not cause price drops.
Periods of Concurrent Increases:
Late 1970s - Early 1980s: This period serves as a prime example. The Federal Reserve aggressively raised interest rates to combat high inflation caused by the 1973 oil crisis. While home prices continued to rise, the rate of appreciation slowed significantly. Data from the Federal Home Loan Mortgage Corporation (Freddie Mac) shows the national average conforming fixed-rate mortgage climbed from around 8.5% in 1978 to a peak of over 16% in 1981. Meanwhile, the Case-Shiller National Home Price Index shows home price appreciation remained positive but significantly decelerated throughout this period [Source: freddiemac.com, freddiemac.com].
Mid-1990s: Another instance occurred in the mid-1990s. The Fed gradually raised rates to prevent overheating of the economy following a strong recovery. While home prices continued to rise, the appreciation rate moderated. Data shows the 30-year fixed mortgage rate rose from around 7% in 1994 to just over 8% in 1995 according to Freddie Mac. The S&P CoreLogic Case-Shiller US National Home Price Index reflects a similar trend with price appreciation slowing but remaining positive [Source: freddiemac.com, standardandpoors.com].
This combination of higher prices and borrowing costs has pushed the median monthly housing payment to a new record of $2,775, up 11% from a year ago. To put that number in perspective, the median mortgage payment needed to buy a home just four years ago in 2020 when rates were lower was only around $1,180.
The lack of homes for sale is also exacerbating the situation, leading to a 4.3% drop in existing home sales in March – the biggest percentage decline in over a year. Costs like insurance premiums, property taxes, and maintenance have also risen, adding to the financial burden on homebuyers.
However, there are regional variations. Some of the most expensive coastal markets in California have actually seen the fastest home price appreciation due to existing homeowners being reluctant to list their properties. In contrast, markets like Florida and Texas have experienced more moderate price growth or even declines in some areas as inventory increases.
New Jersey's housing market reflects many of the national trends, but with some local nuances. The median home price in the state sits at $494,900, a significant 16.1% increase year-over-year. This growth is likely to continue moderately due to the state's tight inventory. As of January 2024, there were only 20,527 houses for sale in New Jersey, failing to meet the strong buyer demand. This has created a seller's market, with homes receiving offers at or above the listing price.
Despite the challenges, well-priced and marketed homes in desirable neighborhoods are still selling quickly, often within 13 days according to the data. Cash buyers who are not impacted by mortgage rates are also playing a role in sustaining demand in certain markets.
The outlook for the housing market remains uncertain, with affordability constraints potentially leading to more price cuts and a continued slowing of the market in some areas. Buyers will need to carefully weigh their options and budget constraints in this rapidly evolving environment.
