Mortgage rates hit their lowest monthly average in nearly a year last month, and 15% of listings saw a price cut in the same period. Top that off with overall job growth — including 9,000 new jobs in the residential construction sector alone — and it seems the housing market may finally be shifting in buyers’ favor, at least partially.
As Issi Romem, Trulia’s newly appointed chief economist explains, “We’re seeing signs that the tides are shifting towards a buyer’s market, but the market hasn’t completely flipped yet and the process can be gradual.”
Signs of improvement for buyers
According to Freddie Mac, January clocked in with an average mortgage rate of 4.46%, a monthly average not seen since early 2018. Considering many economists predicted rates would climb for much of this year — eventually surpassing 5% — the welcome change has spurred on-the-fence buyers and refinancers into action.
At the start of the year, refinance applications jumped 23%, and the demand for purchase loans is 6% above its long-run average, according to the Mortgage Bankers Association. Realtor.com data also shows that price cuts are up by 2%. In total, 39 of the 50 largest metros saw a jump in price cuts during January, with Las Vegas taking the lead.
The same data shows that housing inventory also rose 6% over the year, with increases as high as 12% in some of the bigger markets. Throw in the 9,000 more jobs added to the construction sector last month — as well as rising building permits, housing starts and overall spending in the sector — and that likely means more inventory is on the horizon, too (at least later on in the year.)
Cause for pause
Still, it’s not time to rejoice just yet. Though the market is certainly shifting, it hasn’t completely reversed course from last year’s hot sellers’ market.
One sign that the market hasn’t quite turned yet? Home prices are still rising. Though they’re increasing at a slower clip than in previous years, they’re rising nonetheless, and with the hot spring buying market nearly upon us, buyers can expect more increases on the horizon.
“Home prices typically rise seasonally in the spring as many home-buying families start their search after the winter and look to move before their kids go back to school in the summer,” Romem said. “At the same time, home sales are declining while prices are still rising — just more slowly than in years past — an indication suggesting that the market is turning. Given this trend, buyers can expect to see a modest increase in prices over the coming months.”
But price is only a number, and factoring in income and other economic data, housing isn’t as unaffordable is it may seem on its face. According to the most recent Real House Price Index from First American, consumer homebuying power is twice what it was in 2000, and “real” home prices — which are adjusted for household incomes and mortgage rates — are 36% below their peak during the 2006 housing boom. They’re also 9% lower than they were in 2000.
Mark Fleming, First American’s chief economist, expects that buying power to only increase in the coming months.
“Homebuying power will likely increase as we get closer to the spring homebuying season,” Fleming said. “Household income continues to rise modestly, and I expect mortgage rates to decrease further given recent the decrease in rates driven by volatility in the financial markets and the Fed’s indication that it may have paused rate increases.”
But how long will buying power keep rising? And how quickly do buyers need to act to take advantage of it? According to Fleming, it all depends on mortgage rates.
“This window will continue, but it is uncertain for how long,” he said. ‘The movement of mortgage rates will determine if this window will continue in the early spring, so buyers may need to act within the coming weeks.”
Though not all economists are expecting a decrease in rates, most aren’t seeing any big hikes in the near-term.
Sean Hundtofte, chief economist and head of credit risk at Better Mortgage, expects rates to “stay more or less at current levels,” while Tendayi Kapfidze, LendingTree’s chief economist, says it largely depends on the labor market and politics.
“If the labor market remains tight, we may see rates reflate back to Q4 levels, especially if there is resolution of the some of the political risks including trade, shutdown, debt ceiling and the special prosecutor,” he said.
Still, reaching those Q4 rates wouldn’t be the worst thing U.S. buyers have seen in recent years. Q4 closed out at a rate of 4.64%, higher than the start of 2018, but not the year’s peak by any means.
No such thing as perfect timing
At the end of the day, predictions are only that, and economists warn buyers about focusing too much on anticipated price changes or rate hikes when making a purchase decision.
“It’s generally not advisable to try and market-time a homebuying decision,” Kapfidze said. “Potential buyers should make a lifestyle decision and prepare their finances accordingly, saving for a down payment and optimizing their credit score and debt profile. Once in the market, it’s important to shop for the mortgage as diligently as they shop for the house. This increases the chance of getting the best rate regardless of the overall level of interest rates.”
“Although increasing inventory and price cuts suggest that the tides are shifting, buyers should avoid trying to time the market,” he said. “Your home is where you live, not just an investment, so buyers should really base the timing of their purchase first and foremost on the needs of their family and on their financial ability to take on the purchase.”