Nothing has been able to slow down soaring home prices lately—not even the highest inflation in 40 years. Will rocketing mortgage rates achieve what many dejected buyers and giddy sellers believe is impossible? Or will scores of first-time buyers continue to be priced out of homeownership?
Many homebuyers are hitting their financial limits just as the prime homebuying season kicks off this spring. Rising costs of just about everything are eating into down payment funds. Mortgage rates, which rose nearly a point and a half in the past year and are expected to keep going up throughout the year, are adding hundreds of dollars to the monthly payments of today’s buyers. And yet home prices just keep ratcheting up while the number of properties for sale continues to dwindle.
Today’s buyers are paying about 30% more for a house than they would have just a year ago when factoring in those higher sale prices and mortgage rates. That’s forcing many wannabe buyers to drop out of the market and put their dream of homeownership on hold as budgets can stretch only so far. Mortgage applications to purchase a home dropped 10.1% annually in the week ending March 25, according to the Mortgage Bankers Association.
Most real estate experts believe that higher mortgage rates will force price growth to slow down. While that would mean the end of double-digit increases, prices would continue to rise—just a bit slower. Some even believe prices might fall a little in the parts of the country where they rose the highest, pricing out locals.
“We’ve hit the ceiling for the housing market for a while,” says Mark Zandi, chief economist at Moody’s Analytics.
“The first thing to fall is going to be home sales. People just can’t afford to buy,” he says. “Then we’ll see price growth start to slow. Ultimately, I expect some price declines in some markets.”
The Federal Reserve Bank of Dallas set off alarm bells when it warned of signs of a brewing housing bubble as “purchases arising from a ‘fear of missing out’ can drive up prices and heighten expectations of strong house-price gains,” according to a recent paper.
Americans are worried about rising costs in all aspects of their daily lives. About 26% were struggling to pay their bills in February of this year, according to the March installment of the Capital One Marketplace Index. (The index looks at how the COVID-19 pandemic has affected Americans of different incomes over time.) Nearly half, 47%, report they are concerned about paying at least one bill next month.
That’s led nearly two-thirds, 62%, to say inflation has affected their spending, according to the index. Some of that is likely to spill over into the housing market.
“Homebuyers have to be able to afford their mortgage payments and all of the other things in their budget, [which is] getting harder to do,” says Realtor.com® Chief Economist Danielle Hale.
What will happen to home prices?
High mortgage rates haven’t pushed down prices, yet.
Prices might even rise, at least initially, as buyers race to lock in properties before they’re stuck with even higher rates. That could cause them to make even larger offers to win bidding wars, which in turn, inspire sellers to raise prices.
Nationally, median list prices were up 15.3% in the week ending March 26 compared with last year
However, many real estate experts predict the party might be coming to an end.
“We have learned from history that prices can fall,” notes Hale. “The more important question is if it’s going to happen right now. And that’s hard to say.”
With much higher mortgage rates, “housing is going to have to adjust. It’s unclear if that will mean falling prices or just slowing price growth,” says Hale.
Zandi believes prices will slow and even dip between 5% and 10% in the most overheated real estate markets.
“The declines are going to be in the parts of the country that got the most juiced up, like Boise, ID, and Phoenix, the Southeast and Florida, and over into Texas,” says Zandi. These are the places that locals are struggling to buy in, particularly as they compete against deep-pocketed investors.
“Those are markets that have seen the most stratospheric price gains, and that’s where we’ll see the most comeuppance,” says Zandi.
“The midtier markets may be the most affected as middle-class buyers are hurting from inflation and rising housing costs,” he adds. “The lower end of the market is likely to fare better as there just aren’t many affordable homes for sale. So those sales are expected to remain brisk.”
What could keep prices high and growing?
Before aspiring buyers get too excited, they should realize that there are forces at play likely to keep home prices high.
The biggest is the historic housing shortage. There are still many more would-be homeowners than there are homes for sale. Builders can’t get new homes up fast enough, a problem that’s been exacerbated by labor shortages, global supply chain delays, and local zoning laws. And there is more demand for housing as millennials have reached their peak homebuying years.
But despite all those interested buyers, sellers might be more reluctant to list their homes—leading to even fewer properties going on the market. That’s because most sellers are also buyers. And with home prices and mortgage rates higher, many won’t be able to afford to move up into larger, newer homes. Others might find it will cost them more to downsize into a smaller home than staying put.
“They don’t want to give up their juicy … mortgage rates that a lot of them refinanced into,” says Brad Hunter, president of the real estate consulting firm Hunter Housing Economists based in West Palm Beach, FL.
Those who do sell, and watched their neighbors receive windfalls for their properties, might refuse to settle for lower prices. They could pull their homes off the market if the bidding wars they’d dreamed of don’t materialize.
“Sellers get attached to a certain price they think [their homes] are worth,” says Hale. “It can take a while for sellers to get the message that a buyer isn’t willing to pay the asking price.”
In addition, there will always be some who can still afford the high prices.
Millennials “are starting to advance in their careers, moving up and making more money,” says Hunter. “Because they waited longer than previous generations to look for their first homes, they’ve been working and saving for [longer].”
Investors are also expected to keep prices high and prop up sales. It’s profitable to buy up properties and rent them out as rents are high and unlikely likely to slow down until more housing is built.
Plus, a wave of foreclosures, which would deal a blow to high prices, isn’t anticipated. It’s much harder to get a mortgage today than in the runup to the housing bust. Only the most qualified buyers, who are likely to be able to repay their mortgages, are granted loans. And the current job market is so strong that many homeowners struggling to make their mortgage payments might be able to find higher-paying work.
“It’s only when you start to see a lot of foreclosure sales that you start to see big price declines,” says Zandi.
Could a looming recession cause home prices to fall?
A recession, which some fear is on the horizon, could upend the market further. The U.S. Federal Reserve hiking interest rates in a bid to tame inflation and the war in Ukraine is causing some global instability. However, the nation still has a good shot of avoiding one altogether.
And the housing market should be able to weather it over the long term, particularly for most Americans who plan to spend the next few years in their homes. There is still a housing shortage and more interested buyers than sellers, the opposite of what happened during the Great Recession.
“Recession risks are high and they’re rising. [But] odds are the economy will navigate through,” says Zandi. “At the end of the day, the [housing] market is still tight. I don’t expect to see big declines anywhere.”