The housing market is stuck—and isn’t likely to unstick itself this fall.
Pinned down by high mortgage rates, nearing 8%, the market has slowed to a crawl. Buyers can’t afford to buy, sellers are reluctant to sell, and the number of available homes remains dangerously low. That shortage has led to rising home prices again, forcing many would-be buyers to put their American dream on hold.
The housing market “is weak and it’s going nowhere fast,” says Mark Zandi, chief economist at Moody’s Analytics. “I don’t think it’s going to get any better. But I don’t think it’s going to get any worse—because it can’t get any worse.”
Home sales have dropped sharply this year as there aren’t many homes available to purchase. Most sellers are also buyers, so they don’t want to give up the ultralow mortgage rates they secured during the COVID-19 pandemic to buy a new home at a much higher rate. So they’re staying put until rates come down. That’s worsening the housing inventory crisis, keeping home prices high, and leading to bidding wars and offers over the asking price as buyers compete over a limited selection of residences for sale.
Mortgage rates averaged 7.49% for 30-year, fixed-rate loans in the week ending Oct. 5, according to Freddie Mac. That’s up from 6.66% a year ago and 2.99% two years earlier.
The result? Today’s monthly mortgage payments are about 90% higher than what they were just two years ago, according to a Realtor.com® analysis.* Most of that increase is due to higher rates.
Ironically, high mortgage rates and home prices are a result of the U.S. Federal Reserve trying to bring prices down. The Fed has been hiking its own short-term interest rates since last year in its quest to quell inflation. Generally, mortgage rates move in the same direction as the Fed’s rates. So when the Fed raises rates, mortgage rates often go up.
It’s unclear if the Fed has finished its tightening and mortgage rates can come down a bit—or if there are more increases to come.
The housing market “is going to be difficult and challenging,” says Robert Dietz, chief economist of the National Association of Home Builders, of the fall housing market. “Those who have not been priced out face limited choices.”
It’s not all bleak. New-home sales have been strong. Plus, there is historically less competition for homes in the fall. Families with children in school have generally already moved, and many renters have renewed their leases.
“Fall does present this opportunity to buyers every year,” says Realtor.com® Chief Economist Danielle Hale.
Mortgage rates are expected to remain high
Many economists had predicted that mortgage rates will stay around 7% this fall, but they’ve spiked in recent weeks.
“We do expect mortgage rates to come down, but pinpointing when is tough,” says Hale. “It might not happen this fall. It might be later on this year or even next year.”
The good news for buyers is once the Fed finishes its main inflation-fighting initiative, mortgage rates could dip. And if the economy falters and falls into a recession due to the rate hikes, the Fed is likely to cut the rates it raised.
That doesn’t mean homebuyers should hold their breath for lower rates. Dietz anticipates rates will fall to about 6%—by the end of next year.
For now, the Fed is expected to hold rates steady or even raise them again. Even if it does, mortgage rates aren’t expected to shoot up wildly or hit double digits.
“We’re probably near peak mortgage rates now,” says Dietz.
Home prices are rising again
Homebuyers can’t seem to win. Prices were just beginning to dip—and now they’re rising again.
They should take heart that the huge ramp-up of prices seen during the pandemic appears to be over. Most real estate experts don’t expect home prices to move up by much, and some even think they could go down a little again.
Moody’s Zandi expects to see some price declines this fall—but not by much. He expects prices to dip by a few percentage points by this time next year—nothing like what was seen during the Great Recession when prices dropped 30%.
“Homes at current prices are completely unaffordable,” says Zandi. “For sellers to start selling their homes, they’re going to have to lower their prices.”
Hale expects prices to “move largely sideways,” staying about where they are now.
Meanwhile, others anticipate some slight, single-digit price increases compared with last year.
“The price increases should be pretty moderate compared to what they’ve done over the last few years,” says Molly Boesel, principal economist at real estate data firm CoreLogic. But those high mortgage rates mean buyers’ monthly payments “will be pretty high.”
New-home construction is one bright spot in the market
New homes are becoming a larger part of the housing market since homeowners aren’t giving up their abodes. There’s so little available on the resale market, that buyers are increasingly turning toward new construction.
In July, nearly a third of all homes for sale were new construction, according to NAHB. Historically, new homes have made up only about 10% to 15% of the market.
“That really reflects how limited the amount of existing homes for sale is,” says Dietz. For homeowners, “why would you put your home on the market and lose a low mortgage rate when you can just stay put?”
The gulf between the cost of a new home and one on the resale market has also narrowed. There was only a $30,000 price difference between a new home, at a median of $430,300, and an existing one, at $407,100 in August, according to the most recent government and National Association of Realtors® data.
Plus, builders are often able to buy down mortgage rates, either permanently or as a buy-down. This can save buyers substantial amounts of money, even if the savings are only temporary.
(For example, a 3-2-1 buy-down is when the seller pays to lower a borrower’s rate for the first three years of the mortgage. If mortgage rates are currently 7%, the borrower’s rate would be 4% (3 percentage points lower) in the first year of the loan, 5% in the second year, and 6% in the third year. Then it would revert to 7% for the remainder of the mortgage.)
Who is still buying homes today?
So who’s buying in this market? Those who have to purchase a home.
“Buyers who are wading into this challenging housing market have a strong need to move now,” says Hale. “Anyone who has flexibility in when they can buy a home are probably waiting.”
Most of today’s buyers are folks who have to move due to family or professional reasons. They could be expecting a new child or having their elderly parents or grown children move in with them and need the extra space. There could be a divorce or a death that would precipitate a move. Also, remote workers who are still able to trade more expensive cities for less expensive ones are still on the hunt for homes.
“Homeowners will need to sell at some point,” says Zandi. “They don’t want to move if they can help it, but at some point, they’re not going to be able to help it.”