As home prices dip, so do profit margins
A new report from ATTOM indicates profit margins are starting to come down as interest rates rise and home sales slow.
Key points:
- Gross profits also dropped 6% percent from the second to the third quarter.
- Despite the declines, margins are still at "near-record levels for this century."
- Given current market conditions, homeowners may delay selling to avoid giving up their locked-in low interest rates.
While home sale profits remain at near-record levels, a new report suggests they're taking a hit with the current real estate slowdown.
Profit margins for median-priced single-family homes and condominiums dipped to 54.6% in the third quarter, according to an Oct. 20 home sales report released by ATTOM, a provider of national real estate and property data. During the second quarter, the margin was 57.6%.
The run-up in home price appreciation that began in mid-2020, as interest rates hit historic lows, was unusual and steep, so the latest profit margin is still about 20 percentage points higher than the third quarter of 2020, according to the report.
"If the Federal Reserve's objective was to slow down the housing market, it has succeeded spectacularly," said Rick Sharga, executive vice president of market intelligence at ATTOM. "The market has gone from double-digit annual home price appreciation to below 3 percent, and declining quarter-over-quarter prices."
What remains to be seen is how much more pullback to profit margins — the percent change between median purchase and resale prices — will take place in the coming months. The decline from the second quarter to the third quarter was the largest decline since 2011, when the U.S. was still dealing with the aftermath of the Great Recession.
In an email, Sharga said he expects to see more rapid price drops than what the third quarter numbers indicate. That's because mortgage rates are higher now than they were at the beginning of the third quarter. Also, home sales have declined quickly and home price reductions are occurring at record levels.
"Nationally, low inventory levels will probably protect home prices and keep them from the kind of price deterioration we saw during the housing crash of 2008," Sharga said, adding that some markets will also continue to see modest increases due largely to population and job growth, while other markets will see steeper declines.
Gross profits also dropped 6% between the second and third quarter, coming in at $120,100 for the typical single-family home or condo. That 6% drop was the largest since early 2017.
Large markets that posted the biggest profit declines include San Francisco, Seattle and San Jose. Metros that posted small quarterly profit margin increases include Milwaukee, Miami and Cincinnati.
Homeownership tenure up, but still historically low
Homeowners who sold in the third quarter of 2022 owned their homes for an average of 5.98 years, according to the report. That was up from 5.84 years in the second quarter of 2022, but down from 6.28 years in the third quarter of 2021. In the third quarter of 2020, the average tenure was just over 8 years.
Given current market conditions, Sharga expects homeowners to remain in their homes longer before selling. That's largely because homeowners with a 3% or 4% mortgage may not be willing to trade in that loan for a 7% loan.
"If those homeowners don't absolutely need to sell, they'll simply stay put and wait for market conditions to improve," Sharga said.