The “Five D’s” – diapers, diplomas, divorce, downsizing and death – continue to drive a large share of U.S. home sales, as a majority of buyers wait on the sidelines for mortgage rates to drop.
U.S. home prices increased 0.5% in May compared with April and were up 5.9% compared with May 2023, according to First American’s home price index report.
Home prices nationally are now 54.6% higher compared to pre-pandemic levels (February 2020), First American says.
“In May, annualized house price appreciation slowed for the fifth consecutive month, clearly showing a returning-to-normal trend toward slower price appreciation,” says Mark Fleming, chief economist at First American, in the report. “The normalization of house price appreciation is the result of ‘higher-for-longer’ mortgage rates reducing affordability and slowing demand, but it’s also driven by the increase in the number of homes for sale.”
“The longer we go with higher rates, the less the rate lock-in effect constrains sellers because moving decisions continue to happen regardless of mortgage rates due to the ‘Five D’s’ of life events – diapers, diplomas, divorce, downsizing and death,” he adds.
First American’s HPI segments home price changes at the metropolitan level into three price tiers based on local market sales data: starter tier, which represents home sales prices at the bottom third of the market price distribution; mid-tier, which represents home sales prices in the middle third of the market price distribution; and the luxury tier, which represents home sales prices in the top third of the market price distribution.
“The impact of lifestyle changes on housing demand is a significant reason why starter tier prices continue to outperform prices in the mid and luxury tiers,” Fleming says. “Many millennials are still searching for their first home and now face competition from the oldest members of generation Z. Housing was under-built for more than a decade, so it’s no surprise that starter tier prices are surging in the New York area, St. Louis, Miami and Pittsburgh.”
Photo: Gustavo Zambelli