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Home Sales Boom Amid Disappearing Inventory

Rising prices, limited inventory, and escalating interest rates don’t seem to have discouraged home buyers from getting out there and looking for their dream home. According to information compiled by Redfin, home prices in February increased 7.2 percent from a year earlier to a median sales price of $260,900 nationwide. This was the strongest price appreciation in three years. In addition, last month also marks five years, or 60 consecutive months, of year-over-year price increases since the market bottomed-out and began to rebound.  

“The total level of home equity reached a new peak at the close of 2016, according to recent Fed data,” said Redfin Chief Economist Nela Richardson.

As a result of increasing sales prices, home equities have also increased, posing a problem to first-time home buyers and those with limited incomes. “While great for homeowners, continuously strong price growth across the U.S. since 2012 has posed significant challenges for first-time buyers, especially given such low supply in affordable price tiers,” said Richardson.

However, the news is not all bad. Richardson said, “There is a silver lining on the horizon. Rising prices and increased equity may tip the scales for homeowners who have been delaying their decision to move up, which could add much-needed starter-home inventory to the market.”

The Refin report showed that home sales, constrained by a lack of supply, increased just 1.8 percent over the last year. February saw a 6.4 percent decline in new listings and a 12.9 percent decline in the overall number of homes for sale, marking the third month in a row that inventory has fallen by double-digits and the 17th consecutive month of year-over-year supply declines.

The effect of the supply shortage on home prices was most pronounced in the affordable segment of the housing market. Homes priced below $240,000, which represent the lowest segment of prices across metros analyzed by Redfin, saw February prices increase 8.4 percent year over year and by 100 percent since the market declined in 2012.

In comparison, mid-range homes priced between $241,900 and $432,000, experienced 5.5 percent growth from this time last year and 55 percent since 2012. This strong rate of price growth in conjunction with even gently rising rates set up a challenging environment for 2017 first-time buyers.

As if that is not enough to discourage home buyers, on Wednesday the Federal Reserve raised the federal funds rate by a quarter of a percentage point, which may lead to a slight increase in mortgage rates this spring. Based upon last month’s median sales price of $260,900 and a 30-year fixed mortgage rate of 4.2 percent, the average mortgage payment was $150 more per month than the same time last year when the 30-year mortgage rate was 3.6 percent.

In a recent homebuyer survey conducted by Survey Gizmo, a small handful of buyers said they would stop their home search if mortgage rates exceeded four percent. However, one in four homebuyers said they would either search in a different neighborhood or purchase a smaller home.

Notwithstanding affordability concerns and low inventory, February still proved to be a strong month for buyer demand. Market speed increased again, making for the fastest February that Redfin has on record since 2010. The typical home that sold last month went under contract in 60 days, eight days faster than one year prior. Nearly 15 percent of all homes listed for sale in February were off the market within two weeks, up from 11.7 percent last year.

“Despite strong buyer demand, many sellers are suffering from analysis paralysis right now,” said Redfin Sacramento real estate agent Chris Medina. “Prospective sellers’ greatest fear is that they will not find another home to buy if they sell their home. But low inventory is precisely why they have so much power, especially if they list early in the season,” he said.

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