While For-Sale Demand Weakens, SFR Stays Optimistic

The essential story of home sales can be told in two numbers: 2022 Q1 median sale price of $428,700, according to Census Bureau data, and the June 23 average 30-year fixed mortgage rate of 5.81%, from Freddie Mac.

As John Burns Real Estate Consulting put it, looking back at somewhat earlier figures: “In the first three weeks of May, 30-year fixed mortgage rates hovered near 5.25% and eased to just above 5% by month end. Paired with record-high home prices in most markets, the highest mortgage rates in over ten years (per Freddie Mac weekly data) are cooling demand for new and resale homes.”

A little more tersely, in the style of Yogi Berra, houses are in such high demand that nobody can afford them.

A cooling trend in sales started in March, according to the firm. Back in May, it wasn’t exactly that would-be buyers had canceled purchases, according to builders and real estate agents, “however, roughly 50% in both groups have seen buyers halting their home searches and we expect these percentages to increase throughout the summer.”

John Burns said that it expected mortgage rates would continue to rise as the Fed looks to slow inflation to more manageable levels. That seems a pretty safe bet as the agency most recently upped the rate increases to 75 basis points at a shot and seems likely to do so again. 

Expectations for the for-sale market have fallen. In January, 68% expected good sales over the following six months. By May, that was down to 39%. Over the same period, expectations of good sales among resale agents fell from 81% to 46%.

Single-family rental operators were far more optimistic over the next six months, with almost three-quarters reporting “strong” to “very strong” expected leasing. “Their optimism—paired with strong current leasing ratings, record high occupancy, and rapid lease-up times—point to strength and stability in the single-family rental market, outperforming for-sale demand,” the analysis said. “The monthly cost of owning a typical 3-bedroom entry home currently exceeds the rental cost for a similar home in most markets by a wider than normal margin.”

Additional data from the Federal Reserve helps show why the demand for houses, even if rented rather than purchased, is strong. There’s been a “remarkable” rebound in household formation, as several million adults stopped living with their parents from the pandemic period and moved onto their own. There is also the time lag Millennials have seen compared to Gen-X when it comes to marriage and children, as the Pew Research Center has documented. But as time passes, the percentage of those in families with children rises, as does the desire for more space.