A row of suburban homes with an abstract background of financial charts
Illustration by Lanette Behiry/Real Estate News

‘More wiggle room’ for buyers as rates, supply show promise 

Squint and you can see a bright side as housing starts bounce back and mortgage rates drop a bit (but stubbornly stay above 7%).

May 16, 2024
3 minutes

Key points:

  • Mortgage rates are moving in a positive direction for buyers — but very slowly.
  • Single-family home starts in April were up 17.7% compared to a year ago. More existing houses also are expected to help increase inventory.
  • The trend toward smaller new houses should increase affordability for first-time buyers.

A mixed bag of economic news gives little indication the housing affordability crisis will ease anytime soon.

After positive inflation data, mortgage rates continued a slow drift downward this week but remained above 7%, according to Freddie Mac. A year ago at this time, a 30-year mortgage averaged 6.39%.

"The decrease in rates, albeit small, may provide a bit more wiggle room in the budgets of prospective homebuyers," said Freddie Mac Chief Economist Sam Khater.

The drop in mortgage rates follows a cooling of the inflation rate to 3.4% in April. The Consumer Price Index rose 0.3% in April from March, a little less than expected. The annual core CPI, which excludes food and energy, was 3.6% — its lowest point in three years.

Housing starts recover

New housing starts, the closest thing to a crystal ball for future housing inventory, bounced back in April after dropping 17% in March, to a seasonally adjusted 1.36 million. That's up 5.7% over the previous month. But when zeroing in on single-family starts, the numbers were down slightly, slipping 0.4% from March to $1.03 million.

"Single-family starts were up 17.7% compared to a year ago," said Bright MLS Chief Economist Lisa Sturtevant. "However, homebuilders are starting to feel a little less confidence as mortgage rates hover around 7% and consumer confidence starts to weaken."

"Prospective homebuyers in the market in 2024 likely will see home price growth moderating as more supply comes onto the market," Sturtevant said. "However, some buyers will be pulling back amidst elevated mortgage rates and persistent inflation."

And new construction still isn't keeping pace with demand, cautioned NAR Chief Economist Lawrence Yun, who said a consistent increase is needed "to truly bring about a balance in the housing sector."

"On a positive note, albeit only for the short term, the completion of homes is rising due to past months' higher housing starts," Yun added. "The 1.62 million housing unit completions in April was the second-highest monthly figure in 15 years."

But, Yun said, the recent declines in housing starts will translate to a decline in completions in about six months.

"The housing shortage is not going away," he said. "The laws of supply and demand tell us that home prices are on firm ground and could even reaccelerate in the future unless more is done to boost supply."

A boost for existing homes?

Sturtevant said that with interest rates still high and existing inventory low, new homes have been accounting for a greater share of the market — but that trend may be slowing, at least for now.

"Recently, the supply of existing homes has increased as more homeowners are listing their homes for sale," she said. "More supply should give buyers more choices late this spring and into the summer. Buyers who might have thought new construction was their only option might find more choices on the existing home side."

Homebuilders are targeting the lower end of the market, which should help first-time buyers, Sturtevant said. "Single-family homebuilders have not only been dropping prices, but also have been building smaller homes designed to be more affordable to meet starter-home and mid-tier market demand."

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