Initial existing home sales data for August shows an increase of 0.5% from July’s already rising pace, according to First American Financial Corp.
Odeta Kushi, the company’s deputy chief economist, writes that initial data from August shows that lower mortgage rates, which have fallen from 7.08% on July 1 to 6.25% on Aug. 28, are giving homebuyers relief and increasing their house-buying power by nearly 4% month over month, and 10% from a year ago. But she cautions that the average customer’s homebuying power remains 7% below the two-year pre-pandemic average.
“Finally, we get to share some good news for the housing market,” Kushi wrote in a blog. “We project existing home sales will increase modestly again in August, marking two straight months of sales growth. The better news is that we expect the increase in existing home sales is likely to continue.”
Kushi made the prediction of increased sales based on First American’s Existing Home Sales Outlook Report, which estimates home sales based on the relationship between sales, demographic trends, house-buying power and current financial and economic conditions.
While home sales have seen a jump in recent months as the lower rates are helping to increase inventory levels and bring more homebuyers to the market, Kushi cautions that sales remain lower than one year ago and she doesn’t expect a meaningful increase because of the lack of inventory available and the high cost of homes.
“The recent decline in mortgage rates will entice a small group of buyers off the sidelines, but many more are waiting for the payment-to-paycheck calculation to pencil out,” writes Kushi, referring to the fact that the price of homes, or interest rates need to come down to meet the income levels of potential buyers.
Holding income constant, Kushi estimates that a 0.35 percentage-point monthly decline in mortgage rates boosts house-buying power by $13,000 for the median-income household. The August decline in interest rates resulted in the percentage of renters across the country who can afford a median-priced home rising from 23% to 24.5%. Kushi maintains that even if rates drop below 6%, fewer than 30% of renters would be able to afford a median-priced home.
That forecast could be tested soon as interest rates continued to decline, reaching 6.2% by Sept. 12, according to Freddie Mac. The Federal Reserve is also expected to begin cutting its key interest rate as early as this week, which should lead to lower home loan rates and boost the general economy.
