Home buyer competition toughest at the lower end of a cooling market

Higher interest rates and decreased affordability have led to a reversal of 2021 housing-market trends, with competition now most elevated for the lowest-priced homes, according to new research.

In 2020 and 2021, scarce for-sale inventory at high- and middle-priced tiers, combined with demand from buyers attracted by low mortgage rates and high liquidity, made home buying most competitive in those price ranges, according to the online real estate brokerage Zillow.

But the price surge appears to have caught up with the market. Overall home sales decreased by 24.1% on an annual basis at the end of June, and the fall in demand was more pronounced at the upper end, Zillow said. 

At the end of July, inventory in the most-expensive third of the housing market increased 11% from June and 19.3% from one year earlier. Inventory in the middle third grew 12.7% month over month and 17.3% annually. 

By comparison, inventory also increased in the lowest-priced third, but at smaller margins — up 11.2% month over month and 10.4% from July 2021, a turnaround from last year when supply in the bottom tier expanded at almost twice the rate of more expensive homes.

"Demand is lighter for homes at the top end of the market, and owners appear to be reluctant to sell and move to a different home that will presumably come with a much higher monthly payment at today's mortgage rates," said Zillow Senior Economist Nicole Bachaud in a press release.

Monthly payments on a typical mortgage are also 60% higher than they were a year ago, likely steering potential buyers away from higher-priced homes, Zillow reported. 

"Buyers are stretched thin when it comes to affordability, and they are flocking to the lowest-priced homes on the market to get their foot in the door," Bachaud said.

While Bachaud said it's not yet a buyer's market, research from online brokerage Redfin last week similarly noted a far-less favorable environment for sellers in recent weeks, with bidding wars falling to a more than two-year low among agents in its network. 

And in a new report, Redfin noted roughly 63,000 home-purchase agreements were canceled in July, amounting to approximately 16.1% of contracts, with buyers taking advantage of contingencies allowing them to back out without financial penalty if something goes wrong. Buyers are also more likely to call a deal off if a seller refuses to bring the price down or make requested repairs, the report said.

"Home-purchase cancellations may begin to taper off as sellers get used to a slower-paced market," said Taylor Marr, deputy chief economist at Redfin, in a press release. "Sellers have already begun to lower their prices after putting their homes on the market. They'll likely start pricing their properties lower from the get-go and become increasingly open to negotiations." 

Price cuts are also more prevalent, according to Zillow, with the share across all price levels surpassing 10% for the first time since at least 2018. But while an increase in price cuts over the past six months has occurred across the board, in recent weeks, they have come up less frequently among listings in the lowest tier than at higher price points.

At the end of July, only 10.5% of listed homes in the bottom-third price tier saw a price cut, compared to 11.4% and 12.6% of for-sale properties in the middle and highest ends of the market. 

But while the lower-priced end of the market may have seen less frequent price reductions, they had the largest decrease in size with a median cut of 3.3%. The median among sellers who lowered prices in middle and top tiers was 3% each.