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Home sales rebounded more strongly than expected in February, and the National Association of Realtors says they could have been even higher if there were more homes for sale.
A critical shortage of listings is the No. 1 obstacle, especially in higher price ranges — not rising mortgage rates or new tax laws that reduce certain homeowner deductions.
In fact, homes sales in the West, where prices are highest, jumped more than 11 percent for the month, and the higher end of the market was very active. Nationally, sales of homes priced above $750,000 were up nearly 19 percent from a year ago. New tax laws limit the mortgage interest deduction. Borrowers can now deduct interest paid on up to $750,000 in mortgage debt. Previously, the limit was $1 million in mortgage debt.
Sales at the lowest end of the market, however, homes priced under $100,000, were down 16.5 percent compared with a year ago.
That is the range where the supply shortage is worst.
Home sales did fall sharply in the Northeast, where property taxes are very high in some states, but the Realtors say that was more due to horrendous weather than anything else.
Realtors polled for the monthly survey said they are hearing very few concerns from buyers about rising mortgage rates or the new tax laws, even fewer concerns than in December, when the tax laws were in final debate. That is not the case for potential sellers.
"The one concerning trend is the interest rate lock effect," said Lawrence Yun, chief economist at the NAR. Sellers are telling agents increasingly that they do not want to move because they will lose the record-low mortgage rate they have locked in.
The February sales figures, however, are based on contracts signed one to three months earlier, when rates hadn't moved higher yet.
"That said, higher rates are actually spurring buyers to step up and lock in with a purchase and a funding rate before they head even higher," said Peter Boockvar, chief investment officer at Bleakley Advisory Group. "This was seen in the weekly mortgage application data [last week] where purchases rose 1.4 percent week to week and 6.2 percent year over year."
Mortgage rates are not historically high today, but they are about half a percentage point higher since the start of this year and are clearly on an upward trajectory.
"Mortgage rates are at their highest level in nearly four years, at a time when home prices are still climbing at double the pace of wage growth," added Yun. "Homes for sale are going under contract a week faster than a year ago, which is quite remarkable given weakening affordability conditions and extremely tight supply. To fully satisfy demand, most markets right now need a substantial increase in new listings."
At an open house in Atlanta, buyers were more worried about finding a home than they were about mortgage rates. Most said the good listings were going under contract extremely very fast.
Lisa Reagan has been looking for more than a year and calls the competition "fierce," in her price range. She is less focused on interest rates.
"I think they're fair now, so I wouldn't want to see them go much higher, but I'm not concerned about interest rates," she said.
The number of homes for sale did increase slightly in February, which always happens as the busy spring market approaches, but supply is still down more than 8 percent from a year ago; supply is up on the high end and far lower on the low end of the market. Homebuilders continue to build higher-end homes as well, because rising costs for land, labor and materials have shrunk their margins for entry-level homes.
Shortage on the lower end is likely why first-time homebuyers pulled back in February. There had been a surge in this cohort last year, but clearly affordability and supply is weighing more heavily on them now.
Sales appear to be flattening now at around 5.5 million units annualized, when they should be closer to 6 million, given the demographics, demand and improving economy.
"To get to those levels, demand needs to stay hot, builders need to continue ramping up new home activity and more sellers need to feel comfortable selling. Threading that needle has so far proven difficult," said Aaron Terrazas, senior economist at Zillow.