U.S. faces an upside-down housing market that favors the rich

High interest rates have made it virtually impossible for ordinary Americans to afford a home, but that’s not a problem for the wealthy
By Sam Bourgi
•
31 July 2024
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With millions of Americans priced out of an average home, one tiny corner of the market is thriving thanks to wealthy cash buyers.

According to the National Association of Realtors, homes worth more than $1 million were the only price category to see higher sales in June. Overall, existing home sales were down by 5.4%.

With 30-year mortgage rates averaging more than 7% over the past 12 months, home sales are down across the country. Under normal circumstances, high mortgage rates would hit luxury real estate hardest.

But this is no ordinary housing market.

“Historically, higher-priced homes are the first to feel the hit when interest rates rise,” Ali Wolf, Zonda’s chief economist, told Bloomberg. “We aren’t seeing that today. High home equity and the strong stock market have acted as a buffer against interest rates for wealthier Americans.”

Wealthier Americans are sidestepping mortgage brokers because they are buying with cash. According to Redfin, nearly half of high-end homebuyers made all-cash purchases as of the end of the first quarter.

That’s in stark contrast to first-time buyers who overwhelmingly rely on a mortgage to finance their purchases. Nationwide senior economist Ben Ayers calls this a “bifurcation” of the housing market.

Ayers thinks it's “emblematic of the wider bifurcation we’re seeing in the economy.” “While many folks are cashing in on [soaring asset values], on the other end of the spectrum, people are just getting by,” he said.

Homeownership is increasingly out of reach for ordinary Americans

American homebuyers who haven’t benefited from record stock and property values are sitting on the sidelines, waiting for mortgage rates to drop. Unfortunately, there "isn't a magic fix," according to Bank of America economist Michael Gapen.

In Gapen’s view, it could take years before housing conditions improve.

That’s because Bank of America expects the gap between current mortgage rates and the average mortgage rate of all outstanding loans to remain sizable until at least the 2030s.

This so-called “lock-in” effect will keep the housing market frozen as long as homeowners refuse to sell at the expense of trading in cheaper mortgages and buyers don’t feel incentivized to take on an expensive loan.

According to Dave Liniger, co-founder of real estate agency RE/MAX, even existing homeowners who want to sell and move up to a bigger home can’t do so because “they can’t take their mortgage rate with them.”

In the meantime, average Americans have no appetite to dip their toes in the housing market.

According to a recent Gallup poll, only 21% of adults said now is a good time to buy a home—tied for the worst reading in the survey’s history. Three-quarters (76%) of respondents said it’s a bad time to buy real estate.

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