In this episode of The REconomy Podcast™ from First American, Chief Economist Mark Fleming and Deputy Chief Economist Odeta Kushi dive into expectations for the 2024 spring home-buying season, discussing their outlook for sales, supply and price appreciation.
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Listen to the REconomy Podcast™ Episode 84:
It's also very dependent on mortgage rates. I don't expect that we will see a Fed rate cut until the May meeting at best, maybe even later. So, we may not get any meaningful declines in mortgage rates until we are well into the spring home-buying season.” – Mark Fleming, chief economist at First American
Transcript:
Odeta Kushi - Hello and welcome to episode 84 of The REconomy Podcast, where we discuss economic issues that impact real estate, housing and affordability. I am Odeta Kushi, deputy chief economist at First American and here with me is Mark Fleming, chief Economist at First American. Hey, Mark. I'm not sure if you heard, but Punxsutawney Phil recently predicted that an early spring is in store for us.
Mark Fleming - Hi, Odeta. I did see that. And you know, as our listeners know, we have to talk about the 80s. Punxsutawney Phil was from the 1880s. So there's our 80s reference.
Odeta Kushi - Just had to get...Okay, that's a different kind of 80s though.
Mark Fleming - Close enough. That's all I could do right now. But I actually questioned whether Phil is as accurate a forecaster as economists are.
Odeta Kushi - Well, lucky for you, someone has calculated Phil's success rate. According to an analysis from Storm Facts Weather Almanac, Punxsutawney Phil has been right 39% of the time since the tradition started in 1887. Phil has seen his shadow more often than not predicting a longer winter 107 or 84% of the time.
Mark Fleming - So he's as good, if not possibly better, at predicting an early spring as economists are predicting recessions.
Odeta Kushi - Now, at this point, you may be wondering what any of this has to do with housing?
Mark Fleming - Indeed, I am. I'm feeling there's a stretch here.
Odeta Kushi - Yeah, well, the short answer is, it doesn't really have anything to do with housing. But I am using Phil's prediction of an early spring to ask the question. Do we think the same thing will happen in this year's spring home-buying season? Will the spring bump come early, late, on time, or not at all?
Mark Fleming - I see what you did there. Yeah, this is pretty early to be talking about spring home-buying season. But, first, it might be worth explaining why we care about the spring home-buying season at all.
Odeta Kushi - That's a good question. The spring season is the most important time of the year for the housing market. According to our analysis of sales data from First American Data & Analytics, historically, approximately 36% of all home sales for the year occur from March through June. But why is that?
Mark Fleming - Why, indeed. The housing market's seasonal pattern is driven by factors, such as weather holidays, the traditional school year schedule, all of which may make spring and summer a more optimal time for moving for many potential home buyers. Gotta be moved in before the next school year starts and houses are prettier, which maximizes resale value, with flowers. They sure are. So home-buying activity tends to follow predictable seasonal patterns. It's like Groundhog's Day, every year.
Odeta Kushi - Ah, yes, the long shadow of the Groundhog's Day joke, get it? How long the shadow is? TBD. They just keep coming to me. Alright, the puns are just coming to me. Okay, so home buyers overwhelmingly move in the spring and early summer months, making it the busiest time to buy and sell homes. Sales tend to peak in June and trough in January. During the same period, median home sale prices follow a similar seasonal pattern and are higher on average during the annual seasonal peak compared with the trough. Home prices are certainly a little less seasonal that sales.
Mark Fleming - Yeah, housing market seasonality also shows up in housing market velocity data as measured by the median days on market and in housing supply data as measured by the number of active listings of homes for sale. The peak and trough months won't be identical but, in short, supply and demand increase in the spring and summer months. In the fall and winter, the market cools down, as home sales slow, and the median home sale price declines relative to the summer peak, resulting in fewer homes available for sale. And those that are available tend to stay on the market for longer.
Odeta Kushi - So you mentioned this a little bit earlier. We're recording this podcast in mid-February and spring doesn't start until a month from now. So we're a little a little early to talk about the spring home-buying season. But I'm still going to ask you, what are you seeing in the shadows for spring home-buying season this year?
Mark Fleming - Eye roll number two. That's groundhog reference number three, or four, I think, and stealing my shadow reference to boot. Don't you think I missed that.
Odeta Kushi - I thought that one was subtle.
Mark Fleming - Yes, let's just move right along. Right now it's looking like there may be an anemic start to the spring season, but that's really dependent on mortgage rates. In recent weeks, we've seen an increase in long-term rates because incoming data reports continued to reflect a still-strong economy and a little bit more stubbornly high inflation than we had all hoped for.
Odeta Kushi - So an increase in the 10-year yield means an increase in the 30-year, fixed-rate mortgage. Higher for longer rates might mean a slower spring season. But let's break this down into supply demand and where those two dynamics meet. Prices.
Mark Fleming - Exactly. On the supply side, we look to a few different metrics. Altos data from the second week of February reveals some hopeful news here. There were 66,000 new listings in the second week of February, which is 14% more sellers than last year at this time, and the most since 2020. Pre-pandemic. But context is key. While the seller strike of 2023 is beginning to thaw, there are still 20 to 25% fewer sellers each week than in years past.
Odeta Kushi - And total months' supply of new and existing homes has also picked up recently, but still remains below historical norms. You can thank the rate lock-in effect for that, as we've said in in episodes past. Even if rates come down closer to 6%, many existing homeowners will still be very rate locked-in. Recall that nearly 60% of all homeowners have a rate lower than 4%.
Mark Fleming - But, I have to say any decline in rates is a good decline in rates.
Odeta Kushi - That's right.
Mark Fleming - If you're on the fence about selling, it may help to see rates come down from 7% to 6%, even if you are still right locked-in.
Odeta Kushi - Don't forget about the 42% of homeowners who own their home free and clear. They might feel better about selling, if they see rates come down as well. It also helps that many homeowners are still sitting on a ton of equity, which can be used to offset the higher mortgage rates.
Mark Fleming - But, there's another challenge that's unique to the housing market, where the seller and the buyer are, in many cases, the same -- the existing homeowner. In order to buy a new home, you have to sell the home you already own. And not just any home, one that you like better. Every home is different, an almost perfectly -- as we call it an economics -- heterogeneous and an immovable good. The fewer homes that are for sale, the harder it becomes to find something better than what you already have. If sellers all choose to sell, they would all benefit as buyers because they would increase the inventory of homes available and alleviate the supply shortage. However, the risk of selling if others don't, in a market with a shortage of inventory, keeps all the existing homeowners from selling altogether. We've called this the homeowners prisoner's dilemma, an homage to your favorite economics discipline, Odeta.
Odeta Kushi - Who doesn't love game theory. So, it seems our general expectation for the spring is that we will see a pickup in inventory. In fact, that already seems to be happening. But it won't necessarily be enough to satiate demand.
Mark Fleming - It's also very dependent on mortgage rates. I don't expect that I will see a Fed rate cut until the May meeting at best, maybe even later. So we may not get any meaningful declines in mortgage rates until we are well into the spring home-buying season.
Odeta Kushi - And home buyers and sellers may be holding out for that time. The FOMO or fear of missing out on lower rates is a concern for many.
Mark Fleming - Not to mention, FOBO -- the fear of better options -- with more inventory comes more options.
Odeta Kushi - I like that, FOBO, that's a new one. Now moving along to demand. We saw purchase mortgage applications increase in December and January alongside lower mortgage rates. But applications have dipped in February, so far, as rate progress has stalled.
Mark Fleming - Newsflash. Surprise, surprise. Buyers and sellers are rate sensitive.
Odeta Kushi - Yes, they sure are. And again, we may see rates zigzag a bit until the Fed makes a move, which, as you mentioned, is well into the traditional spring home-buying season months. Again, we don't think we're getting that rate cut in March. We think it'll be May, or even later.
Mark Fleming - That's right. But, for new home sales, it seems the green shoots of spring have already emerged. Builder sentiment has picked up in recent months. Actually, we've gotten some very good news. Just the other day, single-family housing permits have been on the rise and new-home sales have been strong.
Odeta Kushi - Well, that's because builders are still offering incentives, right. The share of builders offering some form of an incentive was 58% in February. That's a huge advantage over the resale market because, you know, in the resale market the existing homeowner will just you know choose not to sell if they don't have to.
Mark Fleming - Builders aren't rate locked-in. They would love to sell you the home because they're not living in it. It costs money not to sell the home. And many of the public home builders have said in their earnings calls that they are not going to be pulling back on incentives, especially the mortgage rate buydown, so that will help the new-home market continue to perform well in the spring home-buying season. Which is why we expect the new-home market to continue to outperform the existing home market this year. But we still have to ask the question, What about prices and affordability?
Odeta Kushi - Ah yes, the intersection between supply and demand. Well, you actually had a pretty great quote in our latest First American Data & Analytics House Price report, didn't you?
Mark Fleming - I do say a lot of things. What did I say again?
Odeta Kushi - A lot of things. Okay, I will summarize. In our First American Data & Analytics House Price Index, which tracks home price changes less than four weeks behind real time at the national, state and metropolitan levels, it was revealed that it seems the pace of annualized home price appreciation peaked in December.
Mark Fleming - Ah yes, lots of words. But the point there is at the end -- peaked in December. And I said that optimism that mortgage rates will fall in 2024, may incent more homeowners to sell, boosting supply and, in turn, improving affordability for buyers. More supply and improved affordability should cool post-pandemic hot house price appreciation. But now I wonder also if the sheer optimism of rate cuts in the future may help in the spring home-buying season.
Odeta Kushi - FOMO, because spring is apparently coming early.
Mark Fleming - Yeah, you had to do it. I've lost count.
Odeta Kushi - I told you, I'm on a roll. FOMO in early spring aside, more supply and lower mortgage rates should eventually help to improve affordability for potential buyers. So far, it looks like more inventory is indeed coming to market. But we haven't gotten the mortgage rate relief just yet. That may need to wait until the summer months.
Mark Fleming - So, what is all of this telling us about the spring home-buying season this year?
Odeta Kushi - It may be a slow start to the season. But, if we get the rate benefit in the second half of the year, it's possible that we'll just see a prolonged spring home-buying season.
Mark Fleming - And our expectation is that the housing market this year will be stronger than last year's market. Last year's market was freezing cold but, in 2024, it will start to thaw at some point.
Odeta Kushi - Alright, well, now Mark, I'm gonna put you on the spot and ask you a question that I know we both get all the time. Is now the right time to buy a house, or should someone wait, for example, for rates to fall?
Mark Fleming - Well, mortgage rate projections are just that, projections, not promises and don't forget how hard it is to forecast them or an early spring. So my advice is to never try to time the market. Trying to time the market is less important than a home buyer's lifestyle needs and financial readiness. While market conditions are important, the decision to buy a home is personal and should be based on the financial preparation and lifestyle choices. If one is financially prepared and buying a home aligns with your lifestyle goals, then it could be the right time to purchase. And there's always the refinance option if mortgage rates are lower in the future.
Odeta Kushi - That is great advice. I am very glad I asked you. Thank you for joining us on this episode of The REconomy Podcast. If you have an economics-related question you'd like us to feature in the future, you can email us at economics@firstam.com. We love to hear from our listeners. And, as always, if you can't wait for the next episode, you can follow us on X. It's @OdetaKushi for me and @MFlemingEcon for Mark. Until next time.
Thank you for listening, and we hope you enjoyed this episode of The REconomy Podcast from First American. We're pleased to offer you even more economic content at firstam.com/economics. This episode is copyright 2024 by First American Financial Corporation. All rights reserved.
This transcript has been edited for clarity.
