Homeowners with a lot of equity are driving a shift toward more expensive homes

Home prices are substantially higher than before the pandemic, but that hasn’t stopped people from buying lavish houses. A lot of it has to do with the sheer amount of equity that some buyers can deploy. 

“Homeowners are sitting on a record amount of equity, and so those who don’t have a mortgage, who aren’t affected by today’s borrowing costs can make moves,” Chief Economist Danielle Hale said in an interview with CNBC last week. 

She continued: “They are able to navigate these higher prices without as much of a ramification…So we are seeing a shift towards more expensive homes, as opposed to less expensive homes among buyers in the market.”

It’s reflective of who is actually buying homes in the present market. Hale explained that they are seeing more sales of higher-priced homes. 

On the other hand, the shift toward more expensive homes could be reflective of who is selling, too. Consider a separate analysis from Zillow senior economist Orphe Divounguy in April; it found that the only housing markets with fresh supply were filled with baby boomers, who aren’t bothered by high mortgage rates. At the time, 17% of baby boomers who owned their homes were free of the lock-in effect (a phenomenon which refers to homeowners refusing to sell their homes for fear of losing their low mortgage rates). Once they sell their homes that have likely appreciated considerably, they might be able to buy another all-cash, meaning they wouldn’t have to worry about where mortgage rates are. 

Still, the overall housing market has remained stuck. New and existing home sales weren’t great in May amid the ongoing lock-in effect, which could last into the next decade, alongside dampening demand. The median sales price for new homes was $417,400 and for existing homes it was $419,300, the highest ever recorded. All the while, mortgage rates are more than double their pandemic lows; the average 30-year fixed daily mortgage rate is 7.14% and the weekly one is 6.86%. 

Maybe that’s why this year’s housing market hasn’t improved as much as previously expected. “So people were expecting more significant interest rate relief, and we got a good break early in the year, and I think that raised expectations,” Hale said. But for now, she’s expecting a higher-for-longer situation, which means less activity in the housing world. 

However, things are changing in some ways. For one, inventory of lower priced homes, between $200,000 and $350,000 is increasing. That’s good for first timers, who made up about slightly less than a third of recent home sales, according to Hale.

And a Redfin analysis from last month found that home prices are rising at their slowest pace in almost a year, and they could be showing signs of plateauing. Mortgage rates are expected to come down, too, once the Federal Reserve cuts interest rates. There is a chance the central bank will only cut rates once this year, but as some suggest, the magic mortgage rate is anything below 6%. 

Either way, Redfin economics research lead Chen Zhao, in the analysis, said a drop in mortgage rates could bring both buyers and sellers back to the market. If that were to happen, prices could either accelerate or decelerate depending on who comes back more intensely. “If sellers come back faster, prices would likely cool, but if buyers come back faster, prices would likely ramp up.”

Subscribe to the Fortune Next to Lead newsletter to get weekly strategies on how to make it to the corner office. Sign up for free.

Source link