A likely shift in the mortgage market is creating 'prisoners' in housing
Prices have recovered to pre-housing-crisis levels. But with slow wage growth, that means there are fewer affordable houses available to buyers, especially in bigger cities.
On the surface, the price trend ought to be good news for existing homeowners looking to sell. However, the likely rise in mortgage rates from historic lows means that there will be less incentive to move, according to Mark Fleming, the chief economist at First American.
"You do become a prisoner in your home because of rates," he told Business Insider.
"There's going to be a growing challenge of an increasing financial penalty caused by the rate lock-in effect over time."
Since the 1980s, the long-term drop in interest rates created a built-in incentive to move, Fleming said. Even if a seller's income was unchanged, it was possible to effectively move into a lower mortgage rate, and so be able to even afford a slightly bigger home.
Prisoner's dilemma
In a market with tight inventory, the decision to sell depends on whether homeowners want to risk selling and then not being able to find a new home.
"The existing homeowner is trapped in this prisoner's dilemma of the cooperative outcome," Fleming said. "If we all acted simultaneously, it would solve the problem. But we can't take the risk of being the one that acts when everyone else doesn't."
In some cases, like when a homeowner is moving, the sell decision is easier to make, if not obligatory. Also, there's a level of home-price appreciation that makes selling an attractive prospect.
'Get used to this new normal'
The question, according to Fleming, then becomes whether new homes can be built quickly enough to catch housing stock up to demand.
This gap has created the most competitive buyers' market on record for existing homes, judging by how long homes stay listed, according to the National Association of Realtors. In April, existing homes listed for a record-low median of 29 days, the NAR said on Wednesday. Shorter listing times suggest buyers are snapping up houses as quickly as possible, indicating a hot market.
"For patient buyers willing to endure the competition and frustration, conditions may ease somewhat in a few months as owners of those listings leftover from the spring season get antsy for a sale and consider price cuts towards the end of the summer," said Svenja Gudell, the chief economist at Zillow, in a note.
"But in reality, these conditions - tight inventory, high demand and rising prices - look to be with us for a while to come, and buyers should get used to this new normal."