By ERIN FLYNN JAY
Gross profits and profit margins remained near record levels for sellers last year but they decreased for the first time since 2011 in what could be seen as a sign of a cooling housing market.
ATTOM released its Year-End 2023 U.S. Home Sales Report on Jan. 24, which shows that home sellers made a $121,000 profit on the typical sale in 2023, generating a 56.5% return on investment.
Compare that to 2022, when the gross profit on median-priced single-family homes was $122,600 and the profit margin was 59.8%.
This drop in profits happened as the median nationwide home price rose at the smallest annual pace in more than a decade, according to ATTOM.
So is this a trend that homeowners who are sitting on the fence about selling should be paying attention to?
ATTOM CEO Rob Barber told The Mortgage Note that profit trends typically follow price changes, tracking up when prices rise and down when prices fall.
“The profit decline we saw last year was a symptom of a slowing market and will likely keep declining by small amounts if prices do the same or stay flat,” Barber explained.
Right now, there are a number of factors that could swing prices either way.
“Declining interest rates would help raise prices and prop up the housing market because they lower borrowing costs,” Barber said. “But multiple other forces are at work.”
Unemployment and inflation rates are low, with both under 4%. The investment market also has hit or approached new peaks in the last month. These factors could keep home prices high.
On the flip side, the expense of owning a home in most of the country already presents a significant financial stretch for wide swaths of the potential buying public.
“Our latest data shows that with prices already at or near record highs, those expenses take up at least a third of average local wages in nearly 90% of county markets across the U.S.,” Barber said. “Anything more than minor price increases could make ownership expenses even tougher without significant wage gains.”
That means that unless buyers start earning more money, they won’t be able to support an increase in housing prices. Sellers who hold onto the hope of big profits might see their dreams fade away as priced-out buyers retreat from the market or offer less than the asking price for homes.
The National Association of Realtors predicts home price growth will be at 1.4% in 2024.
Jessica Lautz, deputy chief economist and vice president of research at NAR, said that number will be slightly up from 2023, which saw 0.9% growth following increases in 2022 of 10.2%.
Lautz said that last year, “there were localized areas that had some softening of the real estate market, but those areas have rebounded in housing demand to a more normalized market.”
Lautz explained that the localized softening they observed occurred directly after an intense housing market, which showed tremendous growth due to low mortgage interest rates and pandemic-induced moves.
Overall, housing inventory is tight in many areas of the country as homeowners who took advantage of those low interest rates are now wearing the golden handcuffs associated with them. As rates start to decline again, “more buyers will enter the housing market and put pressure on an already limited supply environment and home prices,” Lautz said.
Rick Sharga, President & CEO of CJ Patrick Company, said ATTOM’s report is really a case of home prices increasing more slowly rather than a case of home prices dropping.
“After a few years of astounding price increases, which led to home sellers raking in massive profits, what we’re seeing now is more or less the market settling down into smaller price increases and slightly smaller profit margins for people who are selling their properties,” Sharga said.
Sharga said that despite this dip, indexes tracking home sales are showing a significant year-over-year increase in the price of a median home.
“The FHFA (Fannie Mae and Freddie Mac loans) reported a 6.5% year-over-year increase; the Case-Shiller Index showed a 5.5% increase,” Sharga said.
Sharga said sellers who are interested in making a profit this year should have no problem doing so.
“As mortgage rates come down this year – slowly and gradually – we’ll see more buyers come to market than sellers, creating more demand for the few homes listed for sale, driving prices up,” Sharga said.
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