The Housing Scene by Lew Sichelman

Low Rates Stymie Some Buyers

The lowest loan rates in 11 years have brought wannabe homebuyers off the bench and onto the playing field in droves. But low-cost mortgages don’t always help the market.

Housing economist Mark Fleming of First American, a major player in the title insurance field, says persistently low rates can put a damper on the supply of houses for sale.

“While historically low rates increase buying power and make it more affordable for potential buyers to purchase a home,” Fleming says, “they also discourage many existing homeowners from selling.”

In other words, low rates can help make housing both more affordable and more scarce. And when fewer houses are for sale, prices rise -- sometimes to the point that the benefit of the low rates is all but obliterated.

Here’s how Fleming explains it: In a falling-interest-rate environment, there’s lots of incentive to move up, because sellers can afford more house at the same, or even lower, cost. However, when rates are relatively flat, as they have been for the last four years or so, that incentive is taken away. To buy a newer, larger place, sellers either have to either bring cash to the table or be willing to take on a larger house payment -- or perhaps both. And that doesn’t even consider fees such as sales commissions.

So while low rates give rookies more buying power, they don’t do much for move-up buyers. “The only way existing homeowners can increase their house-buying power is through household income growth,” Fleming says, which is why more and more owners “have decided to stay put.”

The result is that the length of time people remain in their homes has jumped dramatically. Prior to the housing recession a dozen years ago, tenure was less than six years on average. In December, incumbency had nearly doubled to almost 12 years. That’s up 8% from just one year earlier.

That means fewer houses are on the market. According to the National Association of Home Builders, the inventory of houses for sale nationally has hit a near-record low of three months. (Generally, six months’ worth of inventory -- that is, how long it would take to sell off the current supply at the current rate -- is considered normal.) And in Seattle, only a few weeks’ worth of houses are currently for sale, said Glenn Kelman of realty brokerage chain Redfin on a recent earnings call with investors.

Kelman, based in Seattle, is convinced that the city’s inventory shortage is so extreme that “the most intensive bidding wars” in two years are on the way.

While Zillow reported recently that the number of houses selling above list price is at a three-month low -- only 1 in 5 are now drawing multiple bids -- Kelman said supply deficits are no longer confined to a few major cities.

Shortages are widespread, he said, adding that he was told recently that 30 buyers made offers on a property -- a mobile home, actually -- in a “far-flung” area of Oregon.

But there’s a second problem that exacerbates the lack of inventory: People who would otherwise put their places up for sale are holding back because they don’t have anywhere to go. If they can’t find another place that fits their needs at a price they can afford, they simply stay home.

Meanwhile, as buyers battle over what little is for sale, prices continue to mount -- absorbing some or all of the savings resulting from lower loan costs. Prices accelerated last fall, with December recording the largest single-month gain in more than six years, according to housing finance analytics firm Black Knight.

Black Knight says for all of last year, prices rose 4.7%, or nearly $13,000 on average. And prices in the lower end of the market rose at an even greater clip of 6.6%. The NAHB points out that for every $1,000 increase in a home’s price, nearly 159,000 households nationwide are effectively precluded from buying that place.

Of course, the number of those priced out varies from place to place. But multiplying Black Knight’s $13,000 price increase by the number of NAHB’s priced-out households means over 2 million families no longer have the income necessary to qualify for financing on the average house.

The same priced-out scenario holds true for mortgage rates: A quarter percentage point increase would drive some 1.3 million households out of the market for the median-priced newly constructed house, the NAHB says.

How all this plays out in the long run is anybody’s guess. Right now, the one wild card that could help open up the market is the new home sector, which should give buyers more choices. The more new places that are built, the less pressure there is on resales.

Starts last year dipped a tad from 2018. But the NAHB is predicting that shovels will break ground for 1.3 million units this year, including 920,000 single-family houses. And in 2021, it expects 925,000 more detached houses to be built.

Builders are not just putting up mega-mansions, either. They’re going smaller. Not only has the size of new homes fallen for four consecutive years -- to an average of 2,520 square feet, the smallest since 2011 -- the number of homes with three-plus bedrooms, three-plus bathrooms and three-car garages are down, though not exactly in free-fall.

The average new home is now only 20 square feet larger than in 2007.