Where to Find Cheap Housing as Median Prices Surge

Americans are pushing through record mortgage rates and buying new homes.

For prospective homeowners, the Midwest offers the most affordable options, according to the Wall Street Journal/Realtor.com Emerging Housing Markets Index report, which was released Wednesday.

High mortgage rates are keeping many homeowners in place. They are not selling their properties and giving up their low rates, in turn suppressing the sales market for existing homes. To find properties, buyers are now turning to newly constructed houses to realize their dream of homeownership. This has created a situation that builders can turn into their gain.

"It helps that builders can be a little bit more flexible in the terms that they can offer buyers. You know, they can pay points to help lower the mortgage rate that buyers of new constructions are getting," Danielle Hale, the chief economist at Realtor.com, told Newsweek.

In September, sales of new single-family homes soared more than 12 percent compared with August—to 759,000—and were up nearly 34 percent from a year ago, beating analysts' expectations, according to data released Wednesday by the Census Bureau and the Department of Housing and Urban Development.

Economists at Oxford Economics had estimated new-home sales of 690,000, as high mortgage rates were expected to push sales down.

Builders, Hale said, approach the market more rationally and are willing to adjust to attract buyers. "Builders don't have any emotional skin in the game. They're just trying to price for what will get the deal done," she said.

Mortgage rates have hovered around 8 percent, making borrowing costs for homes the highest they have been since the turn of the century.

On Wednesday, lenders said that mortgage applications decreased by 1 percent from last week, according to the Mortgage Bankers Association's survey for the week ending October 20.

But buyers may be shifting their perspective. Expecting that rates will remain high, they are willing to buy now before homes become even more out of reach. But affordability is still top of mind, Hale said.

"It's definitely an interesting time for the housing market," Hale said.

In Topeka, Kansas, buyers can get themselves a home for a median price of $250,000. Along with relatively inexpensive prices in such markets is a better quality of living, another incentive for buyers, Hale said. The unemployment rate in Topeka, for example, is 3 percent lower than the national average of 3.8 percent.

"These markets that we identify are markets where it's not just about the housing market but about the local economies. So local economies are on pretty good footing," Hale said. "So not only can you have confidence that the real estate market is doing pretty well today, but it's likely to do well into the future."

Five of the top 20 markets were state capitals, Hale added. Buyers can meet the need for an affordable home in places where they can get more for their cash. "People are going where the jobs are," she said.

One odd outlier in the emerging market report was the Santa Maria-Santa Barbara area in California, where the jobless rate was 4 percent and the median price for a home was a whopping $1.9 million.

"That one is kind of curious," Hale said. "We do see some interest from international buyers in that market, and so that could be driving what's going on."

Even in more affordable places in the country, there's competition for properties where low supply is struggling to meet high demand, and prices are rising. In Topeka, prices for homes jumped nearly 9 percent from a year ago, the emerging market report showed. The median listing price was $100,000 higher in September than it was during the pre-pandemic period in 2019.

But such a market is one way to navigate expensive borrowing costs for a house.

"I think finding a home in an area where prices are lower is one way to combat higher mortgage rates," Hale said. "Especially if you live in a high-cost area now where rents are expensive, those rental dollars can stretch a bit further in more affordable parts of the country."

Younger prospective buyers can look to places like Elkhart-Goshen in Indiana, Springfield, Ohio, and Jefferson City, Missouri, and make the jump to homeownership with added amenities and affordable options.

"There are parts of the country where the housing market is thriving and people can kind of be set up for success, not just today but in the longer run," Hale said.

State of the Housing Market

The jump in September sales was strong across the country, analysts pointed out.

Unlike sellers in the resale market, builders were willing to offer discounts and work with buyers to offer mortgage rate assistance, Yelena Maleyev, senior economist at KPMG, told Newsweek. Average prices for the month declined by nearly $20,000.

"Advertised buy-downs shave off an average of 2 percentage points or more from the current 30-year fixed mortgage rate," Maleyev said.

Nancy Vanden Houten, Oxford Economics' lead U.S. economist, was "surprised" at the high number of sales for September. She echoed Maleyev's comments that the lack of new houses in the resale market was pushing buyers to look at new construction. But the trend could be short-lived, she told Newsweek.

"While new-home sales may continue to be more resilient than existing-home sales, we expect they will weaken in the fourth quarter in the face of mortgage rates at a 23-year high and a slowing economy and labor market," she said.

New homes available for sale, while little improved from August, made up a larger share of the inventory in the market than before the pandemic.

In the resale market, sales fell 2 percent in September and were down 15 percent from a year ago, at 3.96 million units.

"We haven't seen sales below 4 million units since 2010, post-housing-bust," Maleyev said. "Most homeowners were able to lock in a below 5 percent mortgage rate last year and are now frozen in place, unwilling to sell."

She continued: "That is keeping a floor under home prices in many parts of the country where bidding wars continue, especially for the entry-level homes."

The growing interest in new-home sales could affect the economy at large and complicate the Federal Reserve's fight against inflation. Since March 2022, the Fed's policymakers have hiked rates to a two-decade-high range of 5.25 to 5.5 percent. This has significantly pushed up borrowing costs and slowed consumers' ability to buy things like homes and cars. But buyers' willingness to still pay for homes even at high prices could put pressure on inflation.

"Home prices remain high and are climbing higher in many regions, fueling the risk that inflation could buck its downward trajectory and reaccelerate," Maleyev said. "That ups the pressure on the Federal Reserve to bring down inflation outside of homeownership costs. That is one of many reasons that the Fed is expected to hold rates higher for longer."

Update 10/25/23, 3:40 p.m. ET: This story was updated with more background and information.