Lower mortgage rates draw first-time buyers back to the market
Starter homes have emerged as a bright spot in an otherwise sluggish housing market, according to a new report from Redfin.
Pending sales of these entry-level homes jumped 10.2% year over year in July, reaching their highest level since October 2022. This uptick in activity contrasts sharply with the broader market, where pending sales of middle- and upper-price homes fell by 6.5% and 10%, respectively.
The recent dip in mortgage rates, which began in mid-July, is likely fueling the renewed interest in starter homes. First-time buyers, who often have smaller down payments, are particularly sensitive to changes in interest rates, as even slight drops can significantly affect their monthly payments.
“The overall market remains sluggish, but we are beginning to see first-time homebuyers come off the sidelines, buoyed by falling mortgage rates and an increased number of homes hitting the market,” Redfin senior economist Sheharyar Bokhari said in the report. “Not only do you have young families and investors looking at starter homes, you also have buyers who have been forced to consider less-expensive options due to near-record home prices.”
While pending sales of starter homes rose, actual closed sales of these properties fell slightly by 0.6% in July compared to the previous year. However, this decline was less pronounced than the drops in middle- and upper-tier home sales, which fell by 3.9% and 3.4%, respectively.
“More buyers means more sales, but so far we aren’t seeing prices skyrocket, because the rising number of homes hitting the market is enough to satisfy the increased demand—a positive outcome for both buyers and sellers,” Bokhari said.
Given the time it typically takes for a home sale to close, the spike in pending sales suggests that starter home sales could see further strengthening in August.
“Lower-priced homes are really moving right now, especially since rates went down to around 6.5%,” said Derrell Skillman, a Redfin Premier agent in San Antonio, where pending sales of starter homes jumped 22% in July. “We are seeing a lot of younger buyers looking at smaller starter homes. They don’t want a big backyard and a pool, they just want something efficient, with minimal ongoing maintenance required.”
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Despite the increased interest, the price growth for starter homes has been relatively moderate. The typical starter home sold for $250,000 in July, a 4.2% increase from the previous year. This rate of increase was slower compared to mid-range and higher-end homes, which saw prices rise by 4.6% and 5%, respectively.
One reason for the slower price growth is the rise in the number of starter homes on the market. Inventory levels for these homes jumped by 18.9% year over year, the highest level since October 2022, as more new listings came on to the market.
In contrast, inventory increases in other price brackets were more modest, with mid-range and higher-end homes seeing just 4.1% and 1.6% growth in listings, respectively.
However, it’s worth noting that overall inventory levels are still significantly below what they were before the pandemic. For example, there were about 30% more starter homes available in July 2019 than there are today.
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