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Fred Behnke headshot
Category: Insights

There’s No Place Like Home – Ownership

Housing outlook: Availability and affordability at the heart of the current housing market.

By Dana Obrist | June 27, 2024

There’s no place like home.

That’s what Dorothy told us back in 1939 as she wished to return to her roots in Kansas after a harrowing adventure in Oz.

Homeownership has long been a cornerstone of the American Dream, though with higher prices and interest rates coupled with lower inventory of available existing homes it can be a challenging milestone to meet in 2024.

 

Ready to Buy? Supply May be Limited

According to Fred Behnke, head of Homebuilder Finance at Regions, existing housing market supply is at almost historical lows and will likely remain low for years. He noted that many people are essentially locked into their current location and cited a motivation issue when buying a bigger home that costs more and likely now at a higher mortgage rate than they currently have.

“If you bought prior to 2017 or 2018, you probably have anywhere from 30-50 percent equity in your home,” said Behnke. “How motivated are you to spend more and take on a higher mortgage and interest rate?”

 

Location Matters

Most home builders are cautiously optimistic, according to Behnke, who said the industry is holistically in good shape. He noted that affordability will be dependent on geography and the individual buyer’s financial situation.

In Tampa, Florida, Homes by West Bay is the largest private new home builder in the market and President Willy Nunn sees firsthand the housing shortage this area is experiencing.

“While the housing shortage is recognized as a major issue by the state of Florida and federal government, the zoning and permitting processes have never been more challenging at the local levels,” Nunn shared. “Supply will likely remain constrained.”

Our builders are acutely aware of the affordability challenges and work hard to offer the right product at the right location.Fred Behnke, head of Homebuilder Finance at Regions

Behnke noted that his team recognizes the challenges that national and regional builders face.

“We have many clients that are well diversified across multiple markets by product and community but deploy very different strategies from location to location to provide what buyers are looking for,” Behnke said. “They understand that what works in one part of a town or city, may not necessarily work in other areas of that same town or city. Our builders are acutely aware of the affordability challenges and work hard to offer the right product at the right location.”

Nunn expects there will continue to be demand disruptions from time to time with the fluctuations in interest rates, affordability and headline risk.

According to a homebuilder we spoke with in Georgia, the Atlanta market remains solid. However, its relative strength and weakness seems to run parallel with mortgage rate movements with peaks starting in mid-2022 and showing up again in the fall of 2023.

For new construction, the effects of those rates are a diminishment to demand, impacting affordability and qualification, and supply where the lock-in effect on the resale market is prevalent.

 

Finding a Way to Make the Math Work

As Behnke already pointed out, homebuilders are having to explore diversified strategies when considering the right product for a specific market. And even within markets, the demographics and dynamics can vary widely.

“If I’m the buyer and I’m looking to spend $300,000, I’d look to use incentive dollars if offered by a builder on new home construction versus existing housing,” said Behnke. “In many markets builders can offer a competitive advantage over existing home sellers.  The incentive package offered could make the difference between qualifying for a mortgage or not.”

He explained that at entry-level price points, builders may be motivated to offer a forward rate adjustment to get the buyer a better rate. But he noted that if price point is higher, the incentives are going to look different and may take the form of interior upgrades rather than rate incentives.

In many markets builders can offer a competitive advantage over existing home sellers. The incentive package offered could make the difference between qualifying for a mortgage or not. Fred Behnke

“Largely the homebuilder market and housing industry in general are in good shape but of course affordability is a big deal, and I don’t think the dynamic is going to change anytime soon,” said Behnke. “As noted, interest rates are front and center, with pricing and supply adding more weight – combined they are really impacting affordability.”

The sentiment at the start of 2024 was that there may be a handful of rate cuts during the year, but that has yet to materialize.

“With rates staying higher for longer, now sentiment seems to be when and how much will rates decrease,” Behnke said. “Not sure I anticipate any real change in affordability until we see stable and/or lower interest rates.”

Another interesting observation in buying trends is that those purchasing on the higher end are coming to the table with cash offers more often. Behnke noted that in some South Florida communities, builders are seeing upwards of 75 percent of buyers paying cash as a way to avoid getting locked into higher mortgage rates.

“At entry-level price points, seeing all-cash buyers is pretty low unless the property is intended to be an investment property or second home, so it is less common to find that alternative to lower or bypass taking on a higher interest rate mortgage,” said Behnke.

With the higher-for-longer sentiment on rates, the housing market will likely continue to face availability and affordability pressures for the foreseeable future.

For more insights on the housing market, see these May 2024 housing reports from Regions Chief Economist Richard Moody: May Existing Home Sales: Another “Better Than The Headline Number” Report and May Residential Construction: More Soft Headlines, More Solid Single Family Details.

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