Recent trends in home buying paint a bleak picture. Buyers across the United States are facing issues buying homes. Sometimes, these issues are making headlines in the mainstream media, other times they are just ignored. The trends are negatively affecting first-time home buyers, so much so that many are starting to believe buying a home is not on the cards for them.

In this article, I will discuss the latest home buying trends and what insights potential buyers, especially those who never purchased a home before can retrieve from these trends. This article would be especially helpful to those who are thinking of buying a home for the first time.

Supply and Demand Imbalance

The imbalance between supply and demand, caused by the pandemic and the subsequent rate hikes have made the housing market overly competitive. Recent geopolitical events contributed to it. Before the pandemic, there was a seasonal trend in home buying – the market got hot during the spring and cooled off during the winter. But this trend almost disappeared for the last two years. According to recent statistics, this trend is slowly making a comeback, but it will take time for a full-fledged return of the pre-pandemic seasonality. 

Rate Hike Worries

As mentioned earlier, inventories dry up during the winter months but become normal during the spring and summer months. So, the number of listings available for sale has been increasing lately, even though the rate of increase is a bit slow compared to the pre-pandemic years. But home buyers have no reason to celebrate this as rate hike worries can pour hot water onto their expectation of buying a home from the available listings. 

Obscurity around Rate Cuts

The housing market is extremely vulnerable to news about rate hikes/rate cuts. Rates are historically high right now, and there’s no clear idea when rates will subside. There is an indecisiveness on Fed’s part to reduce rates as CPI data of February and March are way above expectation. This obscurity is detrimental for home buyers, as reduced policy rates means reduced mortgage rates, but waiting for rates to come down implies missing out on opportunities to buy some great homes at great locations.

Changing Buyer Behavior

A very recent trend is developing in the housing market. This trend shows that buyers are beginning to get accustomed to higher rates.This is perhaps the most interesting observation. This trend has only started to unfold, but if it fully cements, the home buying market will be even more competitive for first-time home buyers. We can imagine how competitive the market will get if rates are ever lowered by the Fed. The only thing that could disrupt this trend is even higher rates, which I think is too far-fetched. 

Construction of New Homes

Recent data indicate there has been a sharp drop in new home construction. Construction of residential properties and building permits fell to record low, and the single-family home building rate dropped to the lowest in the last three years. Low inventory implies stiffer competition and a possible rise to housing prices. Unless home building activities achieve pace, chances of housing prices climbing down is slim.

Major Challenges Ahead

There are two major challenges ahead. Unless these challenges are addressed and overcame, normalcy in the housing market will never fully return. The first major challenge is inflation. Core US inflation rose to its highest in 2022. While the pace of increase has come down in recent months, inflation is still way higher than the Fed’s preferred 2% range. 

What’s interesting is that discussions on inflation always gravitate towards the Consumer Price Index (CPI), and rarely the Producer Price Index (PPI). However, to understand inflation related to home building activities in the US, the PPI data is more relevant than the CPI data. That’s because the CPI focuses on end consumers. But the PPI tracks the prices of materials and products used in home construction like lumber, concrete, appliances, etc. So, PPI reflects the inflation home builders are facing for their supplies and raw-materials. 

The recent PPI data draws a pessimistic picture. The US Bureau of Labor Statistics report shows the final demand prices moved up 0.6% in February of this year. The YoY 2.1% increase  in March of this year is the largest since the previous high of 2.3% in April, 2023. 

The second biggest challenge is the Fed’s unwillingness to cut the funds rate. Strong US job data and higher-than-anticipated inflation are preventing the Fed from lowering the funds rate. If rates remain unchanged all through this year, mortgage rates are likely to stabilize at 6-7% range for an extended period of time. 

Takeaway for Home Buyers

Home buyers can bargain for convenient mortgage rates, but cannot expect a miracle. They may even have to back off from buying homes due to the harsh realities described here in this article. However, they must keep a tab on how the Fed handles the funds rate conundrum. They must also examine housing inventories year over year to see if there’s any steady increase, and how it impacts the competition.

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