In December we explained that higher interest rates make switching costs (selling your home and then buying another) high, and therefore, the current inventory of homes for sale is low. At that time, a 30-year fixed-rate mortgage for someone with exceptional or very good credit was around 7 percent. Unfortunately, that number has risen slightly to 7.106 percent and remains substantially higher than the 3.58 percent rate that was available just two and a half years ago on Dec. 7, 2021.
Now that we are nearly halfway through 2024, I thought it would be worth a check-in to see how the market is evolving. First, let’s quickly recap the concept of high switching costs.
Here is the basic data. Through May of this year, 57 single-family homes have been listed by Real Estate Agents in the Multiple Listing System in the Town of Aurora. That compares with 65 single-family homes listed for the same period in 2023, and 84 homes listed for the same period in 2022. Year over year we have experienced a drop of 12.3 percent in available homes for sale through May. Similarly, in May of 2022 we had 21 homes for sale, in 2023 we had 14, and this year we had only nine.
It’s actually a great time to sell your house, and your home is probably worth more than you think. But as it did when we last looked at our market conditions, it still poses a big problem. If you are like most of us, if you sell your house, you will need to find a new place to live. And unless you can purchase your new home with cash, buying your next house will require borrowing at the current interest rates, which will increase your living costs. And there is very little inventory for you to choose from. So the market is largely frozen, with people waiting to make any moves in the comfort of their low interest rate mortgages.
The economics of supply and demand predict that with a lower supply of housing inventory, you’d expect housing prices to rise. This remains largely true in East Aurora, with the 2024 median sales price in the Town of Aurora through May up 2.8 percent from the prior year to $347,000.
At some point I do expect that interest rates will retreat. On June 5, the Bank of Canada became the first G7 nation to cut interest rates by .25 percent, to 4.75 percent, and signaled that more cuts were to come. Then on June 6, The European Central Bank confirmed its first interest rate cut since 2019. The US Federal Reserve is set to meet this week, and their plans may come further in to focus at that time.
I would expect that at some point, rates will drop and we will be presented with a flood of inventory. It’s hard to predict when that will actually happen. Although lower interest rates would typically suggest rising home prices, a flood of inventory may create an interesting market where mortgage rates are lower, but prices also drop as inventory soars to new levels. That would swing the leverage in negotiations back toward buyers. We will continue to track these trends with you in the coming months.
