Why Frustrated Buyers are Dropping Out of the Market

It’s not a buyer’s market in residential real estate right now—and many buyers are dropping out in the face of unfavorable market conditions. 

Bright MLS (covering the mid-Atlantic) has published its latest member survey results for May 2024. The survey surmises consumer behavior from agent/broker responses, and the results are eye-catching. Of the buyer agents who responded, 73.1% said that in the past six months, a client has chosen to pause or end their home search. 

The surveyed professionals said in a follow-up question that the primary reason their clients ended their home searches was due to high mortgage rates, frustration with competition from other offers on the same homes (including cash offers) and home prices being too high. 

Bright MLS Chief Economist Dr. Lisa Sturtevant tells RISMedia that macroeconomic conditions, from inflation to mortgage rates, remain the culprit.  

“We haven’t been tracking this question (of how many buyers are dropping out) for more than a few months, but even over those last few months we’ve seen that share increase. I think in the start of the year when mortgage rates were hovering around 7%, there was hope among buyers that rates were going to come down in the spring. And now it seems very clear that the Federal Reserve is not going to cut interest rates until July at the very earliest. And so there are more buyers based on our survey who are perhaps deciding, ‘Look, maybe I’ll wait till the fall when rates come down.’”

Speculating if the share of buyer drop-outs might stretch even higher, Sturtevant noted that seasonality can’t be discounted.

“People stop looking when we get into the summer. So I think we shouldn’t be surprised if that number does edge up a little bit,” she says. “But aside from seasonality, I think we’ve hit a peak on the share of folks who may be stepping aside because of high rates and high prices.”

Toward the tail end of 2023 and the start of 2024, consensus among forecasters was that the new year would see a slow slide toward affordability, with rates likely falling into the 6% range by the year’s end. With 2024 almost halfway over, that hasn’t quite panned out due to inflation not coming down as steadily as it had been at the end of 2023. Fannie Mae now projects that mortgage rates will remain at 7% through the end of 2024.

If the Federal Reserve does not lower interest rates by this summer (something Sturtevant considers a “less than 50/50” likelihood), they are unlikely to come down by the year’s end. Why? According to Sturtevant, because it’s an election year and changing interest rates could make the Fed look like it’s putting its thumb on the scale of the presidential race.

Discussing how agents should be preparing for the palpable possibility that interest rates won’t be decreased this year, Sturtevant pointed to inventory as the upside real estate professionals should be mindful of. 

“What we’ve been seeing agents do is talk to their prospective homebuyers about their financial situations, but then also being able to tell them, ‘Look, there’s more inventory now than there was a year ago,’” said Sturtevant. “There may be more inventory in housing types or neighborhoods that you weren’t looking at before. And I think that that’s going to be true as we head through the rest of the year. So while mortgage rates may still be a constraint for some buyers, the opening up of inventory is going to be a positive for some and may make some return back to the market.”

The buyer segment hit the hardest by elevated mortgage rates is first-time homebuyers; in the Bright survey, 57.2% of the polled agents/brokers said their clients are repeat buyers. After all, someone who has already bought a home is likely better financially positioned overall than someone who hasn’t. Indeed, Sturtevant says she believes income/purchasing power disparities are essential to understanding current buyer demographics.

“What we’re starting to see in the data is really a bifurcation of the market where people who are more interest rate sensitive, moderate income buyers, first-time buyers, they’re the ones who are sitting on the sidelines. But I tell you in our market, the luxury market, the cash market, it’s on fire right now.”

When asked whether mortgage rates influenced their clients’ decision to buy, 48.5% of agents/brokers said their clients were planning to buy regardless of rates. However, when agents/brokers who had clients drop out were asked why their clients had done so, the top reason given was high mortgage rates (63.4% of agents gave this reason). 

Does this suggest that buyers decided to try their hand despite high rates and then got cold feet? Sturtevant argues this discrepancy has more to do with different classes of homebuyers.

“What we’re seeing is the people who are entry level, who are more moderate income buyers, the people who are more interest rate sensitive, those are the ones we’re seeing that agents are saying, stepped out of the market because mortgage rates are too high,” Sturtevant says. “We’re actually seeing our buyer agents answering the question for two different sets of people: people who are less interest rate sensitive, who are the higher income folks, and people who are more interest rate sensitive. So that’s how I have squared the circle on those two points.”

If well-heeled repeat buyers are closing the most sales, could this lead to a positive feedback loop where first-time homebuyers are squeezed out of trying to buy more and more? Sturtevant suggests that this should be averted thanks to one thing: resale.

“Most people who list a home for sale are also buyers. So you can imagine that if we see a lot of new listing activity, if all of those sellers are out there becoming buyers, that new listing activity actually doesn’t make a big difference for those other buyers, those first-time buyers, because it’s like a one for one trade-off. But what we’re seeing in the data is that a sizable share of the new listing activity is actually coming from people who aren’t also buyers. They’re people who are selling a home adding to the inventory, but they themselves aren’t out there looking for a home. Estate sales people selling rental properties, people selling second homes and investment homes are making up a pretty sizable share and growing share of the new listing activity in our market.

“And that’s a good thing for first-time buyers because they’re not competing with somebody who’s out there selling a home to turn around and buy,” Sturtevant continued. “But it is challenging when first-time buyers are competing against repeat buyers who have significant amounts of equity, who may be bringing all cash to the table, or if not all cash, a huge down payment in essence sort of buying down that mortgage rate.”

For more information and the full report, visit https://www.brightmls.com/home.  

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