The year started out with signs showing that the Federal Reserve’s inflation-fighting tactic was effective in cooling down the hot pandemic housing market.
For the first time in 11 years, home prices dropped year-over-year in February as mortgage rates more than doubled following the Fed’s consecutive interest rate hikes, curbing affordability.
However, the median price of a home increased month-over-month for the second consecutive month in March. The median home price is projected to increase for a third month in a row in April to $393,300, which is 2% lower than the previous April’s median price of $401,700, according to data released in May by the National Association of Realtors (NAR).
One big factor behind the strengthening home prices and the decrease in sales volume -- down 23% in April from a year ago -- is the lack of housing inventory.
“Home sales are bouncing back and forth but remain above recent cyclical lows,” says NAR Chief Economist Lawrence Yun. “The combination of job gains, limited inventory and fluctuating mortgage rates over the last several months have created an environment of push-pull housing demand.”
New construction: The great housing inventory divide: New construction vs existing-homes
Where are home prices headed?
Generally speaking, high mortgage rates should prompt house prices to trend downward.
“Yet, housing supply remains so restricted, that any uptick in demand will put upward pressure on prices,” wrote First American Chief economist Mark Fleming in a blogpost. “This is the dynamic that played out in March, as the spring home-buying season ushered in more demand for homes, while insufficient supply prompted buyers to compete and bid up prices.”
Affordability trends in the coming months will depend on mortgage rates and the supply and demand dynamics fueling nominal house price appreciation – dynamics that will play out differently in each market.
“Real estate affordability is local, too,” says Fleming.With median home prices for both existing and new homes above $380,000, and elevated mortgage rates, home buyers are in a tough spot, says Jeff Taylor, founder, Mphasis Digital Risk.
"With 5% down and 7% rates and $600 in non-housing debt, borrowers qualify for these purchase prices if they make above $100,000," Taylor told USA TODAY. "We've seen that buyers are more likely to act when income required to qualify drops below $100k. We need rates in the lower-6% range for this to happen."Taylor expects rates to drop and for inflation to wane this fall.
"So homebuyers shouldn't be discouraged," he says. "Instead, they should get pre-approved by lenders now, and those pre-approvals will only look more attractive as rates drop."
No return to typical seasonality in the market
There will be a lot of uncertainty in the economy over the next few months and prospective home buyers are going to be more opportunistic, as opposed to following traditional seasonal market trends, says Bright MLS Chief Economist, Lisa Sturtevant.
“There will continue to be volatility in mortgage rates as we wait to see what the Fed will do at its upcoming meetings and as we watch economic data roll in over the summer,” says Sturtevant. “Prospective buyers are going to be watching rates closely, and many will try to make an offer on a home when they see rates dip. As a result, we should expect less seasonality this year than we had prior to the pandemic.”
More sellers returning to the market
While inventory will remain low this year, we should expect to see more sellers who had been on the sidelines list their home for sale this summer and into the fall, says Sturtevant.
Many existing homeowners have been “locked in” with super low mortgage rates, which has discouraged discretionary moves.
“However, some people have to move, and others will decide to move for a bigger or smaller home, or to change jobs or neighborhoods, despite rates remaining elevated,” says Sturtevant.
The uptick in new home construction has provided more opportunities for move-up buyers who may have been staying in place because they did not have anywhere to move to.
“One thing that could shut down new listings is if we see a sharp spike in mortgage rates to 8 or 9%, a situation that is still unlikely but not out of the realm of possibilities,” she says.
New home construction
Instability of regional banks is a concern for builder and land developer financing going forward, says Robert Dietz, chief economist for the National Association of Home Builders.
Lending conditions for builders have tightened, and the interest rate for development and construction loans is now well above 10%, which threatens housing supply.
Single-family spec home building loans had an effective rate of 13% in the first quarter of 2023 compared to 9% in the first quarter of 2018.
“Our expectation is that the rate of these loans will move lower as the Fed cuts the federal funds rate, but our forecast is that will not happen until later in 2024,” Dietz told USA TODAY. “As a result, land development would be suppressed, and we risk loaning low on lots during a home building rebound in 2024. Lot development can take three years in a typical market.”
This article originally appeared on USA TODAY: Where are home prices headed? Housing market predictions