Tough year for housing: Record high home prices are good for sellers, not for buyers


By Robert Kleinhenz | Inland Empire Economic Partnership

The local housing market is currently in the middle of its peak sales season. Historically, the peak season in the Inland Empire begins when sales in March jump compared to January and February, the two weakest months of the year. Increased sales continue through at least August, after which they wind down through the balance of the year. Many households find the summer to be an opportune time to move, especially if they have children in school.

The housing market faces three challenges, making 2024 a difficult year for would-be buyers and for those in the real estate industry. First, home prices are at record highs. Second, the inventory of homes for sale remains very tight, with little sign of easing. Third, interest rates are high by recent standards.

The median sales price of an existing single family home in the Inland Empire jumped by nearly $18,000 in one month to $594,250 in March, and set a new record high at $607,000 in April, surpassing the previous peak set in May 2022. The region’s median price has increased in yearly terms for seven consecutive months, with the largest gain of 7.4% occurring last month.

There is no mystery behind the increase in existing home prices. The supply of homes for sale, which stood at 3.3 months in April, is very lean by historic standards. The supply of homes has averaged 2.6 months since mid-2020, well below the regional average of 4.8 months over the last 20 years. In a tight housing market where demand chases lean supply on a sustained basis, the result is upward pressure on prices.

New construction also contributes to the supply of homes available for sales. However, the number of new construction permits in the Inland Empire stood at just 3,600 units through the first three months of 2024, down 13% from 2023. A limited supply of new homes for sale relative to demand will exert upward pressure on home prices through the year as well.

Record high home prices are good for sellers, but not for buyers, especially first-time buyers who often stretch their budget to buy the most they can afford. Buyers must also contend with high mortgage rates. The average rate on a 30-year mortgage nationally was 7.16% as of mid-May, somewhat higher than the rate of a year earlier (6.35%), and more than double the 2.94% rate borrowers had available in May 2021, based on data from Freddie Mac.

Mortgage rate increases over the past two years have been tied directly to the Federal Reserve Bank’s war against inflation. With inflation on the rise during and after the pandemic, the Fed undertook a series of rate hikes between early 2022 and late 2023, aiming to slow economic growth, and in doing so, reduce the rate of inflation.

The Fed knew that interest-sensitive sectors of the economy like housing may be hit hard in the process. Indeed, home sales in the region plunged to levels not seen in a dozen years, partly as a result of limited supply, but also because high rates put off would-be buyers. The inflation rate has not  fallen to the Fed’s target of 2%, so much anticipated rate cuts this year will likely be pushed to the end of 2024 and into 2025.

Today’s mortgage rates require some historical perspective. Recent mortgage rates are near the 7.7% average of the past five decades, but they are nowhere near the record high rates of 40 years ago that approached 15%. But neither of these is relevant to today’s buyers, who have only known the ultra-low rates below 4% that generally prevailed from 2012 through 2021, coinciding with a protracted period of extremely low inflation that averaged 1.9% over that period. That is the frame of reference for buyers today who face sticker shock with interest rates that are more than double what they were just three years ago.

Interest rate differentials also play a role in limiting the supply of homes available for sale. To the extent current home owning households bought or refinanced during the era of ultra-low rates, they face little financial incentive to move. They bought their home when rates were rock bottom, so any move that involves financing will mean a higher rate. Moreover, their property tax increases are limited as long as they do not move. So existing home owners have little incentive to pull up stakes and move to a new home.

With the Fed adopting a wait-and-see approach to inflation, today’s rates will be with us through a good part of the 2024 peak season. Still, there will be households that need or want to move over the next several months, due to changes in household circumstances, relocation due to job changes, and other circumstances. Despite the challenges, some households who had postponed their decision to buy in anticipation of lower rates will leave the sidelines and enter the market. They will face tough choices, likely having to rethink where they want to live, how much home to buy, and how to finance it. But, while high interest rates will slow housing market activity, they will not halt it.

The larger, long-term issue for the region is the affordability challenge and determining how it will meet its future housing needs.

Prices are market signals, and rising prices are a signal of scarcity. Based on its current housing needs assessment, the region should be building approximately 38,000 units annually through 2029, but there were just 20,000 permits last year and 17,000 in 2022. Put simply, the solution to the region’s affordability challenge is to build more housing units that will meet the needs of households across the income spectrum.

Robert Kleinhenz is CEO, Kleinhenz Economics and director, Cal State Long Beach Office of Economic Research

The Inland Empire Economic Partnership’s mission is to help create a regional voice for business and quality of life in Riverside and San Bernardino counties. Its membership includes organizations in the private and public sector.

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