Home Prices Hit New Highs in May 2023
In a surprising turn of events, home prices have soared to record heights in May 2023, according to the Black Knight Home Price Index. As we explore the reasons behind this surge, we uncover two significant factors influencing the housing market. A decline in new listings, coupled with the growing acceptance of higher interest rates among buyers, has contributed to the present situation. But where is the demand coming from amidst high prices and limited supply?
Why Prices Are Surging & Current Median Home Price
According to investment firm Black Knight Home Price Index, home prices hit a record high in May. Currently, 2023 is on pace to have about an 8.9% appreciation, which is not far off from some of the double-digit returns that we saw just a couple of years ago. There are really two main components to why are we seeing this surge in prices once again.
First, new listings are down about 25% year over year nationwide and we're actually seeing about 30% decline here locally in the Huntsville, Alabama market. This trend is primarily due to many homeowners experiencing the "mortgage rate lockdown" effect, wherein they have secured mortgage rates at 4% or lower, resulting in a lack of motivation to sell their properties, especially when current interest rates are closer to the 7% range.
The second significant factor is that buyers are gradually adjusting to the higher interest rates. While these rates might not be considered high when viewed historically over the last 50 years, they do stand as relatively high compared to the past 20 years. As a result, buyers are adapting to this new norm, becoming more comfortable with rates at 7%, which, in turn, is causing a continuous increase in housing prices.
As of May, the median price of existing homes nationwide has reached $396,100, while in our local market, it stands at $340,400. North Alabama proves to be more affordable compared to the rest of the nation. However, when we focus solely on the average price in Huntsville, we find it to be quite close to the national figure, coming in at $387,000.
With High Prices, Where is Demand Coming From?
If the housing supply is low and prices are high, where are all these buyers coming from? It really comes down to two things, cash buyers and the D's.
We're sitting at about 70% of the market high in terms of transaction levels. Normally, about 25% or so of the market transacts in cash. Now that we have higher interest rates and we have more money in the system through inflation and money printing from the Fed, cash buyers are actually making up about 40%. Baby boomers, in particular, are benefiting from this situation, as they possess significant cash reserves and are making more cash offers not only for themselves but also for their children. This approach allows them to view it as a more profitable investment than keeping the cash in the bank, where it may only earn around 4% to 5% in Treasuries or CDs. By paying cash for a mortgage instead, they avoid a 7% interest rate, resulting in a better return on their investment.
Another contributing factor is what we refer to as the "D's." This encompasses various life situations: diplomas, where individuals graduate and desire a new home; distance, as people seek to relocate for new jobs or to be closer to family; and distressing events like divorce and death. On the brighter side, there are also joyful occasions like "diapers," when new additions to families require more bedrooms in their homes.
With the D's and cash buyers, that's equating to 70% of the highs and that's really where we're seeing most of the volume in this market right now.
If you're wanting to get into this market before prices get too out of control or you want to take advantage of the equity that you have and move up to your next home, shoot us an email at moving@mattcurtisrealestate.com or contact us here.
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