Affordability | The One Issue That Will Derail Home Price Growth

Homeowners NOT Selling

Why are so many likely home sellers (retirees, empty nesters, etc.) sitting out what many are calling the best real estate market ever?

According to Alice, a Natick homeowner for the last 20+ years, “I want to sell my home but it’s just too expensive and difficult to find a new home in this market. I don't want to rent and I don't want to be homeless. Besides any profit I make on the sale of my existing home will be used to pay for my new home. There are no deals out there and everything is relative.”

Alice’s response is not only understandable but fairly typical these days. Homebuyers including those selling their home are frustrated and concerned by the lack of homes available for sale. This is why many “would be” home sellers have decided to sit out this rare market opportunity to sell.

Homebuyers NOT Buying

As we discussed, the lack of housing inventory is forcing “would be” home sellers to sit out this market which is only making the current supply-demand imbalance in housing worse.

The good news, however, is that the current imbalance is shrinking albeit ever so slightly. The bad news is what’s causing the imbalance to shrink. That is a decrease in buyer demand not an increase in supply, as homebuyers are now being priced out of the market due to the compound effects of rising home values and mortgage (interest) rates.

“Homebuyers are gradually being priced out of the market which oddly is correcting the present supply-demand imbalance in single-family homes”

As respects Team Coyle’s outlook for home price growth in the 2nd half of 2022, we renew our guidance (First Inflation, Now Higher Interest Rates) that home price growth will continue to increase but at a decreasing rate as the pool of eligible homebuyers gradually declines due to affordability issues.

Our guidance takes into consideration the Federal Reserve bank's decision to raise its key policy rate (see next section below) and our expectation that the inflation rate will reach double digits before year-end.

The Federal Reserve Strikes Again

On April 21, 2022, Jerome Powell, the Chairman of the Federal Reserve’s finally acknowledged that inflation (see chart following) is running much hotter than it previously anticipated and that more aggressive action on their part is needed.

Unfortunately for homebuyers that means higher borrowing costs as the Federal Reserve intends to raise its key policy rate from 25 basis points (previous guidance) to 50 basis points. It also means that homebuyers with marginal financial capacity will face affordability issues as the combination of higher home prices and finance costs may hinder their ability to qualify for a mortgage loan.

Advice for Homebuyers

The first step is to hire a qualified real estate agent who knows the market and can advise you on how to get your offer accepted. If you are planning to finance your home purchase, then you need to work with a qualified lender to secure a pre-approved mortgage loan. Invite your real estate agent to get involved in those conversations. They should be able to help you make an informed decision on how much house you can afford, and which communities match your budget and needs.

You should also discuss with your agent and loan officer the feasibility of waiving the mortgage contingency in any offer you make. Ultimately, you may elect not to take that step, but you should at least have that conversation as many accepted offers are taking that step.

Lastly, don’t get discouraged and exercise patience. This home sellers’ market won’t last forever and eventually you will find a house within your budget and that meets your needs. Like the old proverb says – “good things come to those who wait”.

Matt Coyle, Co-founder of Team Coyle, is a professional real estate agent at Compass, who specializes in helping individuals and families buy, sell, and invest in real estate throughout the Eastern (primarily Metro West) region of Massachusetts. If you have more questions about this topic or our services, please contact us at teamcoyle@compass.com.