Profit margins on median-priced single-family home and condo sales in the US increased to 59 percent in the third quarter, according to The ATTOM third-quarter 2023 US Home Sales Report.
That’s the second consecutive quarterly increase following several declines. The biggest quarterly increases in typical profit margins came in metro areas many don’t often consider.
Scranton, Pa., led the way (margin up from 72.2 percent in the second quarter of 2023 to 92 percent in the third quarter of 2023); followed by Reading, Pa. (up from 70.3 percent to 88.5 percent); Flint, Mich. (up from 66.7 percent to 84.6 percent); Evansville, Ind. (up from 32.9 percent to 45.9 percent) and Roanoke, Va. (up from 44.4 percent to 56.3 percent).
“The improvement in typical profit margins – from 56.6 percent in the second quarter of 2023 – came amid a continued rebound in the US housing market that pushed the median nationwide home price up 2 percent to a new high of $350,000,” according to the report.
Rob Barber, chief executive officer for ATTOM, said in prepared remarks that prices and profits around the US got another boost over the summer as the housing market continued recovering from last year’s setbacks.
“Things do remain uncertain heading into the market’s annual fall slowdown, especially at a time when mortgage rates are rising again [above 8% this week], home affordability is getting tougher and the potential for a recession hangs in the air.
“But the latest gains fell in line with what we often see during the third quarter and showed that any predictions of an extended market fallback may have been premature.”
Pierre Debbas, Managing Partner, Romer Debbas, tells GlobeSt.com that the increased profit margin is indicative of the biggest issue in the marketplace and that is lack of supply.
“The Fed was under the false impression that drastically increasing interest rates would bring down housing prices, but they did not realize that the only way to avoid the rapid price appreciation while maintaining a healthy transaction activity level would be to increase supply and provide incentives for development targeting entry to mid-level home buyers,” Debbas said.
“These profit margins are likely being driven by cash buyers and those not as impacted by the current interest rate environment.”
J. Catherine Rollins, Director of Urban Land Institute Boston/New England, tells GlobeSt.com that she agrees a scarcity of homes on the market, driven by the foundational issue of significant decades-long underproduction of homes in many regions, continues to drive home sale prices upward and with them, profit margins.
“At the same time, markets respond negatively to predictions of economic slowdowns,” Rollins said.
“When economic conditions outperform previous predictions, prices may increase, which may have contributed to recent profit margin gains. A climate of significant global uncertainty, however, may once again slow growth.”
Nick Narodny, Founder and CEO, Aalto, tells GlobeSt.com, “It’s unclear that the Fed knows what the Fed will do, but the general consensus is that home prices will continue to rise into 2024. Will this be true in 2025?
“While we could do complicated math to figure out what this means for profits in different scenarios, we think that misses the point. The point is that fees matter more than ever to homeowners keeping high profits, even if home prices are appreciating.
“When an investment is stellar, fees are annoying. But when prices only slightly increase, fees quickly turn a profitable investment unprofitable.”
As an example, a seller paid $300,000 for a home in 2022 with 20% down ($60,000) using an interest-only loan, and now they want to sell the home for $315,000.
If fees were 0%, they’d make $15K (or a 25% return). Of course, this excludes the math on interest payments, rental income, taxes, etcetera, but overall, the return is not too shabby.
But because fees are typically 5%+, they’ll only get $299,300 in cash from the sale. So, after they pay off their loan, they’ll be left with $59,300, so they’ll have lost nearly $1,000 even though home prices rose 5%.
“If your home didn’t appreciate significantly, you may not be making nearly as much as you thought you would.”