With the recent announcement in the reduction of interest rates by the Federal Reserve, many potential buyers of homes, investors, lenders, appraisers, real estate brokers, et al had a sigh of relief—or potential relief, hoping in many instances that the housing market would show signs of greater activity.
After all, such optimism is justified—right?
Maybe, but there are many additional issues and influences on the housing market beyond the question of the applicable interest rate that borrowers must face when undertaking financing to acquire the home of their dreams.
The US Census Bureau released on 9/25/2024 its statistics on new residential home sales for single-family houses. For August 2024, such sales were at a seasonally adjusted annual rate of 716,000 units. The Census Bureau noted this is 4.7 percent below the revised July 2024 estimate. This number remains far below the housing that is needed, that, under some estimates, is around 7 million homes. However, given the noted reduction in the interest rates that probably will be charged for new home loans, because of the actions by the Federal Reserve in lowering interest rates as noted above, a home buyer might assume that things are looking good in that the interest on new home loans should be lower, now that the Federal Reserve has acted.
However, there are more issues to address in the housing area than interest rates. Notwithstanding the interest rate reduction, consider for a moment a few other hurdles or obstacles that a home buyer (and others) must face before there is a revival or binge in home sales.
What about other concerns that impact the home purchase, such as:
With the concern with inflation, do potential home buyers have the necessary downpayment to purchase the home in question?
Not only has the cost of consumer goods increased because of inflation, but the cost of a home in question has also increased. On a nation-wide basis, the median sales price of a home in August 2024 is about $416,000; the price of many homes in the US may easily be closer to $600,000, depending on the location. Of course, it can be much more than this in areas such as in NY City or LA, Ca. (In California the price is closer to $860,000.)
With inflation, the downpayment concern for buyers has now increased. Even with a downpayment of 10 to 20% this is often a very difficult requirement to meet for the purchase of a home.
Costs on sale of a home: Another consideration for a buyer of a home is the costs associated with the disposition of the existing home, if this applies.
If homeowner X wishes to move from X’s existing X-1 home and acquire a “move up” abode, X-2, there are additional costs and concerns for X.
There are disposition costs to sell the X-1 home and move to X-2 home. These may include sales costs and other arrangements, such as moving costs, etc. There are also fees to pay brokers, if applicable, financing charges for a new loan, etc.
When X considers acquiring home X-2, what other considerations are there for X?
Certainly, there is the concern for X that another, suitable home, might not be available for X, to fit the needs for X. That is, what is the inventory of possible homes that is present in the location desired by X? What is the cost of the same? Are loans available to X to acquire X-2? What other costs, aside from interest, will X face for home X-2? What additional loan costs exit, such as points? What is the charge for insurance on the new home? What are the property taxes? What cost in income taxes does X face when selling X-1? (Yes, there is a law to exclude up to $250,000 of gain from income tax on the sale of X-1. But, if X has been in the X-1 house for many years, his gain could exceed the exclusion of the $250,000—or $500,000 for a married couple meeting certain requirements.)
There are many other costs that X must consider. If X cannot meet the demand for these costs, X may choose to retain X-1. This failure to sell by X means that someone else who might have purchased the X-1 house will not have this opportunity. Thus, the failure of one person to sell means there is a reduction of the inventory in the market for a potential buyer of the given home that was not sold, i.e., X-1
Because of more governmental regulations and cost to process land and to gain approvals for building of new homes, there are fewer homes on the market for sale. X must deal with this issue, too. X will not move or desire to move from the X-1 house without a reasonable outlook for X to acquire, according to his needs and position, the replacement property, X-2.
X has limited resources, as do most consumers, when dealing with the decision to buy or not buy a home. The general rule seems to be that a consumer should not spend more than 30% of the consumer’s income on monthly housing costs. Thus, X is not constrained merely by the amount of the downpayment available to X. X must look to the monthly payments needed for the home. If the price of the home has increased as well as the costs to operate the home because of property taxes, insurance, etc., along with the monthly payment, X may not be able to move from X-1 to X-2 if X cannot meet the monthly obligations for the purchase of the home.
Occupancy costs for homeowners and for renters is more than 30% of the income earned by most consumers. X and other consumers must contend with these economic conditions that place a limit on what most consumers can spend on housing costs.
Uncertainty is another issue of concern for X.
What will happen in the economy is also a hurdle that X must consider when weighing the purchase of a home. If there is war, what will this do to jobs, home expenses, and other costs.
What impact will the coming election have on X and X’s housing issues?
The choice of housing is impacted by other non-economic issues as well, such as family, job, education, personal desires, religion, safety, and much more.
There is little doubt that moving to a new abode has slowed within the US over the last 5 years. Not many years ago the average home was selling approximately once every 7 years. Now, the average sale time is closer to every nine years—as reported by the National Association of Realtors. Of course, there are many factors that impact when one chooses to move, including such issues as being in the military, being a student, job changes, etc.
Until many of the above issues are addressed, such as the cost to purchase and maintain a home, it is likely that most folks will tend to stay longer in their current home as opposed to moving to another location.
By
Mark Lee Levine, Professor University of Denver
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