Home Price Growth Slows, But High Costs and Economic Worries Deter Buyers

The housing market has been a rollercoaster ride in recent years, with home price growth slowing down and economic uncertainties causing some buyers to retreat. As the Federal Reserve continues to raise interest rates, mortgage rates have risen, making home purchases less affordable for many potential buyers. This article will explore the current state of the housing market, the impact of high costs and economic worries on buyer sentiment, and the regional differences in housing markets that have influenced home price growth and buyer behavior.



The slowdown in home price growth is evident in the latest data. According to the U.S. News Housing Market Index, existing home sales are expected to remain low as long as mortgage rates remain well over the 6% level. This is due to the fact that higher mortgage rates reduce the affordability of homes, making it more difficult for potential buyers to qualify for loans and purchase properties. As of the second quarter of 2024, nearly 86% of homeowners with mortgages had interest rates below 6%, but this share has been declining as sellers are forced to list their homes for various reasons such as job changes, the need for more space, and the three Ds: death, divorce, and debt. This decline in the share of homeowners with interest rates below 6% indicates that more homeowners are facing higher borrowing costs, which can make it more challenging for them to sell their homes or purchase new ones.

Economic uncertainties, such as inflation and job market instability, play a significant role in shaping homebuyer sentiment and purchasing decisions. These factors can influence the demand for housing, as well as the affordability and accessibility of housing for potential buyers. For instance, during the COVID-19 pandemic, the uncertainty surrounding job security and income stability led many potential homebuyers to delay their purchasing decisions. Additionally, the rise in inflation and interest rates can make mortgages more expensive, further reducing the affordability of housing and potentially discouraging homebuyers from entering the market. Conversely, when economic conditions are stable and unemployment is low, homebuyer sentiment tends to be more positive, and purchasing decisions are more likely to be made.

Regional differences in housing markets, particularly between first-tier and second-tier cities, have significantly impacted home price growth and buyer behavior in China. First-tier cities, such as Shanghai, have experienced more significant and consistent home price increases compared to second-tier cities. As shown in Figure 1, the growth rate of housing prices in Shanghai diverged from the growth rates of GDP and income per capita, especially in 2003, 2009, and 2015. This indicates that housing prices in first-tier cities have been driven by factors other than economic fundamentals, potentially including speculative investment and sentiment. The study by Miller et al. (2011) found that the impact of collateral effect on growth of Gross Metropolitan Product (GMP) was three times stronger than that of the wealth effect. This suggests that the housing market's influence on economic growth is more pronounced in cities with higher housing prices and more speculative investment, such as first-tier cities.

The study on Shanghai's housing market (Fan et al., 2019) revealed that the impact of buyer-seller sentiment on housing returns was negative, while developer sentiment had a positive effect. This indicates that buyers in first-tier cities may be more cautious and risk-averse, while developers are more optimistic about the market's future prospects. In contrast, second-tier cities might exhibit different buyer and developer sentiment dynamics, influencing home price growth and investment decisions.

In conclusion, the slowdown in home price growth, coupled with high costs and economic worries, has deterred some buyers from entering the market. Regional differences in housing markets have also played a significant role in shaping home price growth and buyer behavior. As the housing market continues to evolve, it is essential to monitor these trends and their impact on the overall economy.