America Has Two Housing Markets Right Now

Something unusual is happening in housing.

More homes are for sale. Buyers have more negotiating power. Builders are offering incentives. Price growth has slowed dramatically from the pandemic years.

Those things should be bringing buyers back.

But many buyers still aren't buying.

At the same time, higher-end and luxury buyers are behaving very differently.

Economists have a name for what we're seeing:

A K-shaped housing market.

Picture the letter K.

One arm moves up. The other moves down.

At the top are households that already own homes, have substantial equity, investments or enough income and cash that today's mortgage rates aren't stopping them.

At the other end are buyers whose decisions depend heavily on the monthly payment, especially first-time buyers trying to enter the market without existing home equity.

And we're beginning to see this divide clearly in Atlanta.

Here's Something I Found Fascinating

Realtor.com recently studied what people are actually looking at online.

In 2021, homes priced at $370,000 and below attracted 54.2% of online home-shopping traffic.

Today?

Just 42.8%.

At first, you might assume buyers simply want more expensive homes.

That's probably not what is happening.

Realtor.com found that engagement with lower-priced homes has fallen to its lowest level since 2019.

In other words, some payment-sensitive buyers appear to have stopped shopping altogether.

That's important because it can make the market look healthier and more balanced than it really is.

Normally, if there aren't enough affordable homes, buyers compete fiercely for the ones available.

This time, some of those buyers simply aren't showing up.

The problem isn't necessarily desire. It's buying power.

Atlanta Is Showing Us Both Sides of the K

The latest Atlanta data tell an interesting story.

Inventory has increased.

Price appreciation has slowed considerably.

Buyers have more time and negotiating power than they did during the pandemic market.

Yet demand remains soft in many price ranges.

At the same time, FMLS recently reported something very different at the top of the market.

In July, Atlanta-area homes priced above $1 million recorded 397 closed sales, up 14.1% from last year.

Luxury buyers haven't disappeared.

Why?

Many aren't entering today's market empty-handed.

They may already own a home with substantial equity. They may own stocks and other investments. Some are paying cash. Others are borrowing much less relative to the value of the home they're purchasing.

That gives them a very different experience from someone trying to save their first $20,000 or $30,000 while also paying rent.

They're technically participating in the same housing market.

Financially, they're starting from very different places.

Now Builders Are Telling Us the Same Thing

This week's builder-confidence report added another piece to the puzzle.

National builder confidence increased slightly in August but remained weak at 35 on a 100-point scale.

Anything below 50 means more builders consider market conditions poor than good.

Here in the South, which includes Georgia, builder confidence fell to 31.

For perspective, the Midwest was 45 and Northeast 44. The West was lowest at 27.

But the most interesting part of the report wasn't the number.

It was who is still buying.

NAHB Chief Economist Robert Dietz reported that custom-home builders continue to experience stronger conditions than builders constructing speculative homes, reflecting better conditions at the higher end of the housing market.

That sounds remarkably similar to what we're seeing in Atlanta luxury sales.

Meanwhile, builders are working harder to reach payment-sensitive buyers.

For 16 consecutive months, at least 30% of builders surveyed have reported cutting prices to support demand.

Builders are also using mortgage-rate incentives, closing-cost assistance and other concessions.

That creates opportunity for buyers who can qualify.

But there's another reason I'm watching builder confidence.

Today's Slow Building Could Become Tomorrow's Supply Problem

This is something consumers don't normally think about.

When builders aren't confident they can sell homes profitably, they don't simply lower prices forever.

Eventually, they build fewer homes.

And we're already seeing construction pull back.

That's potentially important in a growing region like Metro Atlanta.

Think about the cycle:

Homes become expensive → buyers pull back → builders offer incentives → builder margins get squeezed → fewer homes get built.

Now imagine mortgage rates eventually decline or household incomes catch up enough that buyers return.

If construction has been reduced significantly in the meantime, those returning buyers could eventually face another shortage of homes.

That isn't a prediction.

It's a risk worth watching.

And it's why a builder-confidence number matters even if you aren't buying a newly constructed home.

The Bigger Story Is Wealth

Here's where the K becomes particularly interesting.

Homeownership isn't only about having somewhere to live.

For millions of American households, their home is their largest asset.

American homeowners collectively hold roughly $35 trillion in home equity.

The average homeowner with a mortgage has roughly $310,000 in equity.

That creates a tremendous financial advantage when purchasing another home.

Consider two buyers.

One owns a home with $250,000 of equity.

The other is purchasing for the first time.

The homeowner may sell, take part of that equity and put $150,000 down on the next house.

The first-time buyer has to create that down payment from income and savings.

That's a very different starting line.

And then compounding begins.

What Does Normal Appreciation Actually Look Like?

Forget the pandemic housing boom.

We should not assume homes will appreciate at those rates again.

Let's use a simple illustration of 3% annual appreciation instead.

That isn't a forecast. It's simply a reasonable example showing how compounding works over time.

Illustration assumes 3% annual compounded appreciation. This is not a forecast or guarantee and does not account for mortgage principal reduction, transaction costs, maintenance, taxes or improvements.

Look at the $400,000 example.

At only 3% annual appreciation, a $400,000 home becomes approximately $464,000 after five years.

That's about $64,000 of additional property value without anything resembling pandemic-level appreciation.

And that doesn't include mortgage principal being paid down.

This is where time becomes important.

The Divide Isn't Simply Rich Versus Poor

I think that's too simplistic.

A more useful distinction may increasingly be:

People who own appreciating assets and people trying to acquire their first one.

A middle-income homeowner who purchased years ago may have accumulated substantial equity.

A higher-income renter who hasn't purchased may have none.

And someone who bought a modest home years ago can potentially have more housing wealth than someone earning considerably more today.

That's why I don't think this should become a negative story about wealthy Americans doing well.

The important question is:

How do we keep the path to ownership open?

Because ownership has historically been one of the primary ways ordinary American households have accumulated wealth.

There Is Good News

This isn't a story about the door to homeownership closing.

There are signs that conditions are beginning to improve.

Price appreciation has slowed.

Inventory has increased.

Sellers are negotiating again.

Builders are offering incentives.

Bidding wars aren't defining every transaction.

And starter-home affordability has recently shown improvement nationally.

That means today's buyer may have something buyers in 2021 didn't have:

Leverage.

A builder's mortgage-rate buydown can sometimes improve affordability more than a price reduction.

A seller contribution toward closing costs can preserve a buyer's savings.

A house sitting on the market longer can create negotiating room.

And more inventory gives buyers the ability to compare rather than compete.

Those are meaningful changes.

The Morton Report: News You Can Use

35: National builder-confidence reading in August. Anything below 50 indicates more builders view conditions as poor than good.

31: Builder confidence in the South, including Georgia.

397: Atlanta luxury-home sales above $1 million in July, up 14.1% year over year.

42.8%: Share of online buyer traffic now going to homes priced $370,000 and below, down from 54.2% in 2021.

About $35 trillion: Approximate home equity held collectively by American homeowners.

$63,710: Five-year appreciation on a $400,000 home at a hypothetical 3% annual compounded rate.

One Thing to Remember This Week

A housing market can become better for buyers while simultaneously becoming harder for some people to become buyers.

That's the paradox hiding inside today's housing numbers.

More inventory doesn't solve affordability by itself.

Lower prices don't necessarily offset higher financing costs.

And fewer competing buyers aren't necessarily evidence that people no longer want homes.

Some may simply be waiting until the numbers work again.

That is why I'm watching more than home prices.

I'm watching who is participating.

Because one of the most important housing questions of the next several years may not be:

"Will home prices rise or fall?"

It may be:

"Can more Americans get back onto the path of ownership and participate in the wealth that ownership can create?"

There are encouraging signs that the market is slowly moving in that direction.

And that is a housing story worth watching.

The Morton Report

Facts, perspective and news you can use about housing, real estate and the economy.

Sources: FMLS; Georgia MLS; National Association of Home Builders; Realtor.com; Federal Reserve; Cotality; Atlanta Agent Magazine; Houston Agent Magazine.