Profits, prices post quarterly drops amid slowing sales

Seller profits in the third quarter fell 3%, as home prices showed the first signs of declining in years, according to a new home sales report by real estate data intelligence provider Attom.

Profit margins — the percentage change between median purchase and resale prices — dropped to 54.6% from the second quarter's 57.6%, down by at least three points in over half of 186 metropolitan areas tracked. Year-over-year margins, though, were still up in 78% of markets. A year ago, seller profits came in at 47.6%. 

Median national home values dipped by almost 3% as well, with over half of markets reporting flat or negative growth in the quarter, as surging mortgage rates take a cut out of affordability and buyer interest. The median home sales price dropped 2.7% in the third quarter to $339,815 from $349,266 in the second. But the median value was still 9.4% higher from $310,500 a year earlier.

Attom's findings correspond similarly to recent data from several other groups showing annual housing cost increases slowing, as cuts in asking prices are becoming more frequent. Many point the finger at the central bank for current anxieties in the market, as it attempts to curb inflation through regular interest rate hikes this year. Since the start of 2022, bank officials have raised the federal funds rate by 300 basis points. Freddie Mac's benchmark 30-year fixed rate came in at 6.94% this week, more than doubling in one year.

"If the Federal Reserve's objective was to slow down the housing market, it has succeeded spectacularly," said Rick Sharga, executive vice president of market intelligence at Attom.

"With rates the highest they've been in over 20 years, home buyers face serious affordability challenges, with monthly payments in some markets up 50% year-over-year. It's very likely that home prices will continue to weaken in many markets in the coming months," he said.

The biggest quarterly decreases in home seller profit margins among metropolitan areas with more than 1 million residents occurred in San Francisco, which dropped from 85.1% down to 65.4% between the second and third quarters, followed by Seattle with a fall from 87.2% to 73.7%. San Jose, California, saw profits drop from 87.5% to 76.7%. 

San Francisco also reported the largest plunge in median quarterly home price, down 13%. It was followed by New Orleans at 7.5% and Seattle at 7.2%.

But the overall drop in home-sales numbers has opened up pockets of opportunities for buyers at the lower end of the market. The share of purchases with financing from Federal Housing Administration-backed loans increased quarter over quarter for the first time in a year, climbing to 7.9%, or one in 13, from 6.7%, Attom said. But the third-quarter share was still below its mark of 8.2% a year ago.

A potential, but gradual, shifting of the tide in the purchase market could be underway when comparing current trends to 2021 numbers analyzed by NerdWallet.

In a new report, NerdWallet found that while purchases last year grew by 9% overall, the number of FHA-backed mortgages declined 5%. FHA-guaranteed loans are frequently used by first-time and lower-income buyers.

Other categories of federally guaranteed loans, such as Department of Veterans Affairs and U.S. Department of Agriculture-backed mortgages, also dropped by 1% and 16% respectively. Meanwhile, conventional mortgages, which require higher credit scores and stricter standards, surged by 15%. 

Approximately 511,300 mortgage applications were denied in 2021, NerdWallet also determined, with 31% rejected due to prospective borrowers' debt-to-income ratio, which often comes in higher among first-time buyers. Credit history and insufficient collateral were each cited for 16% of denials.

Attom's quarterly home sales report also noted that purchases made with all-cash offers remained elevated, despite the shrinking median prices. A total of 35.7% of single-family home and condo sales in the third quarter of 2022 were paid for in cash, just off the eight-year high of 36% three months earlier, but still above the 33.9% recorded a year ago. 

The share of institutional investor purchases increased to one in 15, or 6.7% of the total, compared to 6.4% in the second quarter. In the third quarter of 2021, institutional buyers accounted for 8.4% of purchases.