Welcome, prop.text readers!

In issue 35, we explore the signs affordability might be coming back along with how both home buyers and investors are taking a step back in this market.

publicly.traded → Signs of Affordability
industry.chatter → Investors and home buyers are stepping back
beyond.the.curve → Homebuilder stocks have a bounce

Signs of Affordability Creep Back Into Housing Market

It might be time to crawl out from under that housing rock, as a market that has been hamstrung by elevated mortgage rates and record high prices finally seems to be loosening up. At least, according to these headline writers:

• It looks like the housing market may be bottoming out (Business Insider, Sept. 2)

• The U.S. housing market is 'finally starting to listen' to homebuyers plagued by high mortgage rates and home prices (Forbes, Sept. 3)

• June's Housing Affordability Improves Despite Rising Home Prices (National Association of Realtors, Aug. 15)

Part of the shift can be attributed to the fall in median sales price, which the Census Bureau said  was $410,800 at the end of the first quarter, down from a peak of $442,600 in 2022. Meanwhile, workers are doing better; personal income has increased around 5% over the last five years, according to the Bureau of Economic Analysis.

Mortgage rates also appear to be continuing their downward trend, with the 30-year fixed rate falling to 6.28% on Sept. 8, according to Mortgage Daily News. (This is down from about 7% in May.) An expected quarter percent rate cut by the Fed at its Sept. 16-17 meeting could eventually push rates lower, though the correlation between the overnight rate that the Fed controls is not as predictive as the 10-year Treasury bill, which more closely tracks mortgage rates. The 10-year is now around 4%, down nearly 50 basis points from its rate in mid-July. 

But here is prop.text’s reality check: affordability has improved in some parts of the country, but a starter home in many parts of California will still run upwards of a million dollars and the median sale price of an apartment on the Upper West Side of Manhattan is around $1.4 million. As we’ve written about before, housing is very much a regional phenomena, so affordability means something different in Toledo than it does in Washington, D.C.

Still the bigger picture is encouraging. Housing affordability across the nation improved by 3.1 percent year over year in June, marking the fifth consecutive annual gain, according to First American, a financial services firm. (Both the Business Insider and Fortune stories were largely based on the First American report.) The Real House Price Index (RHPI) indicates that affordability is still 70 percent worse than the pre-pandemic five-year average, but there are reasons for hope among potential buyers.

“For prospective buyers who have been waiting on the sidelines, the housing market is finally starting to listen,” First American’s chief economist Mark Fleming wrote at the end of August.

The company’s RHPI differs from other housing measurements because it takes into account consumer buying power over time, including income and interest rate changes.

But First American is not the only outlet saying home prices are becoming more affordable.

The recent Home Price Report from Cotality showed that prices were up only 1.7% in June year over year, which means they were declining when adjusted for inflation. The report also highlighted regional disparities, with West Virginia’s 5.5% annual increase the highest in the U.S., while northeast states like Connecticut, New Jersey, Rhode Island, and Illinois had increased three times the national growth rate. Florida, Texas, Montana, and Washington D.C. had negative growth rates.

Forbes magazine also noted these geographic differences.

“Slower price growth coupled with a slight drop in mortgage rates will improve affordability and create a window for some buyers to get into the market,” said Lisa Sturtevant, chief economist at real estate agency Bright MLS,  told Forbes. “Buyers will have more leverage in many, but not all, markets. Sellers will need to adjust price expectations to reflect the transitioning market.”

The story was different in the rental market, with rents increasing 2.9% year-over-year in the single-family residential (SFR) market, Cotality reported. This is a positive sign for investors, and suggests potential buyers are renting instead of buying.

Fleming says the housing market is going in the right direction and if rates drift back into the 5% range, more people will be able to enter the market. 

“While this process will take time, likely years,” he wrote. “The balance of power is no longer as one-sided as it was during the pandemic frenzy.”

Investor purchases of homes are falling in some parts of the country, according to Redfin. Just 17.1% of homes in the fourth quarter were purchased by investors, the lowest level since 2020, and down from 19% a year earlier. Redfin agents report that investors in some cities are not buying because the rates of return have dropped off from what they could get two or three years ago. In some cases, investors even worry about having to sell at a loss. Three of the five metros where investor purchases fell steepest were in Florida, including Orlando (down 27.5%, more than any metro). It’s followed by Chicago (-23.3%), Miami (-21.3%), Atlanta (-18.4%) and West Palm Beach, FL (-14.5%).

Home buyers are backing out of deals at the highest rate in nearly eight years. In July, more than 15% of purchase agreements fell through, the highest percentage since Redfin started tracking cancellations in 2017. The highest percentage of these occurred in Texas and Florida, two markets where inventory is up and prices are falling. (Cancellation lows of 11.6% were in 2020 and 2021.) Buyers seem nervous about the rising costs of homeownership and worry about job security. With more houses available, and fewer buyers in the market, those looking are getting choosy. “We have lots of homes available,” Rhonda Forte, a real estate broker in Fort Worth, Texas, told Business Insider. “If they don't like this one, they can go to the next.”

Lowe’s is preparing for a rebound in the housing market even if it is stuck in neutral in many parts of the country. CEO Marvin Ellison said the home improvement retailer expects demand to increase for its products and has positioned itself to cater to the professional remodeling market, he told an interviewer at Goldman Sachs Global Retailing Conference in New York City in early September. “We are prepared for when the housing recovery happens. The data tell us that by 2033, we’ll need 18 million new homes just to meet current demand. So we know the inflection in housing is coming. We just don’t know when. Our plan has been: Let’s have a strategy so that we are prepared for when it happens, and we can get our percent of that recovery.”

Just Because

Since 1998, a team of 40 has been building a thirteenth-century castle using only thirteenth-century tools, techniques, and materials, working under the guidance of medieval archaeologists. The most recent problem to solve at Guédelon Castle, located in an abandoned quarry in Burgundy 100 miles southeast of Paris, was what to put in the window frames. Glass was exceedingly expensive in the 13th century, reserved for churches and royal homes. Solving this problem was part of the plan for constructing the castle: every obstacle would reveal something that historians, researchers, archaeologists, and scholars who specialize in studying castles didn’t know. For the windows, the team settled on linen, stiffened with beeswax, which they had discovered covered windows at or Palace of Popes in Avignon, begun in 1252 and one of the grandest of châteaus of this period. “At Guédelon, we’re looking for what disappeared in traditional archaeology,” says Florian Renucci, the master mason and site director. “Experimental archaeology means bringing to life what workers can do. We’re always looking, hearing, feeling. Now, with our work, the castle can speak.” To read more, to see a slideshow and videos, visit Archaeology magazine.

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