Housing Demand Remains Strong Despite Increased Borrowing Costs

Aaron Scholl - September 6, 2023
Housing Demand Remains Strong Despite Increased Borrowing Costs

Mortgage rates, the ever-powerful forces shaping the dynamics of the US housing market, remain at the forefront of activity as we push into the latter half of 2023. The first half of the year has witnessed the profound impacts of these rates, effectively creating a wedge between aspiring homebuyers and homeowners who locked in historically low rates of 3% or less. This wedge is particularly pronounced across the entire US – marking a significant reversal in the historic housing price growth observed since the onset of the pandemic – a decline of 3.1% in listing prices from Q2 2022 to Q2 2023, after accounting for inflationary factors.

In contrast, South Dakota’s housing market has displayed remarkable resilience, though there are some signs of a slowdown. South Dakota has maintained substantial listing price growth, reflecting an impressive 7.3% increase from Q2 2022 to Q2 2023. This upward trajectory in listing prices, despite a slightly decelerated pace in the new construction market, underscores the distinct nature of South Dakota’s housing landscape. Although homebuyers in the state face similar challenges due to rising rates, continued price growth indicates robust buyer demand relative to supply across South Dakota.

Housing Summary and Forecast

Source: Dakota Institute, Census Bureau, Realtor.com, Freddie Mac, BLS
a Annual and quarterly values are averages.
b Affordability index is calculated using the National Association of Realtors methodology

Another crucial gauge of housing demand is the number of building permits issued. Delving into these figures reveals a nuanced picture, where potential buyers increasingly hesitate to opt for new construction in the face of higher prices and borrowing costs. South Dakota has been a standout in this regard, experiencing remarkable growth in building permits since the pandemic’s onset. This growth included consecutive years of double-digit expansion, peaking at an impressive 48.2% surge in 2020, followed by substantial year-over-year growth of 24.8% in 2022. However, a closer look at short-term trend indicates a substantial slowdown in permitting activity, with a 23.3% year-over-year decline in Q1 2023 and a 37% year-over-year decline in Q2 2023.

The wider US housing market has also shown similar signs of weakening. Permitting activity began to slow in late 2022 and 2023 has maintained that trend. Permit issuance declined 15.3% from Q2 2022 to Q2 2023

Shifting focus to the supply side, the last few years have signaled a noticeable slowdown in homeowners’ willingness to sell their properties, both at the national and state levels. This trend has contributed further to the elevated prices observed in recent years as supply struggled to keep pace with surging demand. More recently, as the national market slows, the US has seen significant declines in the number of new listings, with a decrease of 17.1% from Q1 2022 to Q1 2023. Conversely, while South Dakota initially saw a substantial reduction in new listings from Q1 2022 to Q1 2023, likely influenced by an extended winter, the state’s housing market has displayed some resilience. The supply side rebounded modestly, showing 0.2% growth from Q2 2022 to Q2 2023, in contrast to the continued contraction of 23.6% in the US from Q2 2022 to Q2 2023.

Aggregating these data points to the most salient feature of the housing market illustrates the unique situation South Dakota finds itself in. Despite inflationary pressures, economic uncertainty, and rising mortgage rates, South Dakota continues to experience elevated listing prices. In fact, median listing prices in South Dakota have recently grown more than three times faster than at the national level. South Dakota’s median list price grew 17.5% compared to the national average of 5.2% from 2021 to 2022. In the most recent data, we see this trend continue. While the US saw modest growth of 1.7% from Q1 2022 to Q1 2023, South Dakota enjoyed 10.7% listing price appreciation over the same period, and a 1.7% decline nationally and 7.3% increase in the state in Q2 2023, even after accounting for inflation factors.

South Dakota and United States Median List Prices

Inflation-Adjusted 2022 Dollars

The impact of strong buyer demand, combined with the ongoing upward trajectory of home prices, has amplified the pressing issue of housing affordability in the South Dakota market. Although the state retains relative affordability compared to the national average, the past year has seen a swift deterioration in affordability conditions, effectively excluding marginal homebuyers from the market. Looking ahead to the remainder of 2023, we hold the expectation that mortgage rates will stabilize, leading to an improved affordability landscape for those currently grappling with housing challenges. This anticipated stabilization in housing will translate to decreased moving costs for existing homeowners, an expansion in housing supply, and a likely reduction in persistently high listing prices. This positive outlook aims to mitigate the affordability crisis, ensuring a more accessible and sustainable housing market in South Dakota.