Fiercest Homebuying Competition Is For the Cheapest Properties, Zillow Says

Demand for U.S. homes has cooled as higher mortgage rates coupled with rising prices strain family budgets. But the slowdown hasn’t been uniform in every price bracket.

Buyers are now flocking to the lowest-priced homes in many markets, boosting demand for entry-level properties, according to real estate company Zillow (Z).

Homes in the bottom price tier made up 27% of sales in the week ended June 20, but only 25% of sales during the same week a year earlier, Zillow said in an Aug. 16 report. Compared to a year earlier, sales of the cheapest homes dropped 14% that same week, compared with a 20% retreat for mid-tier homes and a 25% decline for the most expensive homes, the report said.

When mortgage rates increase, as they have this year, buyers typically qualify for smaller mortgages because lenders vet them based on a ratio that compares their income with their monthly bills, including what the amount would be for a new home loan.

The average U.S. rate for a 30-year fixed mortgage was 5.89% last week, according to Freddie Mac (FMCC). That compares with an average rate of 2.88% a year earlier, before inflation and the Federal Reserve’s decision to tighten monetary policy to fight it caused mortgage-bond investors to demand higher yields.

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Inventory as a Gauge of Housing Demand

Another gauge of demand is the inventory of available homes, which has increased from historic lows as higher mortgage rates cooled demand market-wide, said Zillow.

Inventory for the least-expensive homes gained at the slowest pace, increasing 10% in July from a year earlier, the report said. That compares with a 17% jump for mid-tier properties and a 19% gain for the most expensive properties.

“With higher mortgage rates and after more than a year of record price gains, the lowest-priced homes in each market are attracting the most buyers,” the report said.

Home prices surged at a record pace in 2021, jumping 18% from a year earlier, according to the National Association of Realtors. The pace probably will slow to 12% this year and 2.1% in 2023, according to an NAR forecast.

“Home-price appreciation continues to become more gradual as the Fed has worked to manage inflation and raised mortgage interest rates,” said Steve Reich, chief operations officer of Finance of America Mortgage.

While mortgage rates are more than two percentage points higher now compared to this time in 2021, they are more in line with pre-pandemic levels, Reich said.

“For that reason, I believe that prospective homebuyers should look at the glass half full as they continue or begin their home search,” he said. “More inventory and slowing demand may provide some wiggle room, and savvy buyers may be able to take advantage of this opportunity.”

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Sellers Slashing Asking Prices

So far this year, the average rate for a 30-year fixed mortgage has averaged 4.72%, according to Freddie Mac. That’s close to the 2018 annual average of 4.54%, Freddie Mac data shows.

The percentage of prices being slashed for all price tiers is above 10% for the first time since at least 2018, when Zillow’s series began. Among recent weeks’ listings, the lowest price segment reported fewer price cuts than the other two groups, Zillow said.

“The shifts in inventory and sales, and the movements in price cuts, show that the market is in the midst of a rebalance,” the Zillow report said. “And while homes aren’t going to be getting any cheaper any time soon, the balance of power in the market is giving buyers who can afford to stick around more of an upper hand than they have had at any other point since the onset of the pandemic.”

The share of listing price cuts that exceed $25,000 has been declining since the peak in early June, the report said. Sellers are adjusting their expectations and adapting to the changing current market conditions before setting their listing price, know that an increase in inventory means buyers are more willing to wait for a lower-priced home, Zillow said.

“This shows that while sellers are still getting used to the current market conditions, expectations have already come down toward earth from the extravagant list prices that the sellers of 2021 were able to get away with,” the report said.

The inventory of U.S. homes for sale dropped to an all-time low of 850,000 in January and February, according to data from NAR. That number has increased every month since then, reaching 1.3 million in July, the highest in a year, NAR said.

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