Lew Sichelman

The lowest mortgage rates in 11 years have brought wannabe homebuyers off the bench and onto the playing field in droves. But low-cost mortgages dont always help the market. 

Housing economist Mark Fleming of First American, a major player in the title insurance field, said 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 saidthey also discourage many existing homeowners from selling. 

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

Little Incentive to Trade Up 

Heres how Fleming explains it: In a falling-interest-rate environment, theres 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 doesnt even consider fees such as sales commissions. 

So, while low rates give rookies more buying power, they dont do much for move-up buyers.  

The only way existing homeowners can increase their house-buying power is through household income growth, Fleming said, 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. Thats up 8 percent 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 citys 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. 

Millions Now Priced Out 

But theres a second problem that exacerbates the lack of inventory: People who would otherwise put their places up for sale are holding back because they dont have anywhere to go. If they cant 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 said for all of last year, prices rose 4.7 percentor nearly $13,000 on average. And prices in the lower end of the market rose at an even greater clip of 6.6 percentThe NAHB points out that for every $1,000 increase in a homes 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 Knights $13,000 price increase by the number of NAHBs 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 said. 

New Homes the Wild Card 

How all this plays out in the long run is anybodys 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. Theyre 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.

Lew Sichelman has been covering real estate for more than 50 years. He is a regular contributor to numerous shelter magazines and housing and housing-finance industry publications. Readers can contact him at lsichelman@aol.com. 

Low Rates Stymie Some Sellers

by Lew Sichelman time to read: 4 min