After an intense two-year buying frenzy during the pandemic, the once-hot US housing market has started to cool.
The US Federal Reserve set interest rates to its highest level in over a decade, and mortgage rates are sitting well above 6% for a 30-year fixed rate. The effect on the housing market has already started to show: the National Association of Realtors reports existing home sales in May were down 20% compared with a year earlier. And the median home sales price in May was $419,103, according to real estate company Redfin, a 3.1% drop compared to last year.
But even if there are fewer home buyers on the market and prices have been falling slightly, home prices are still much higher than before the pandemic, and that is unlikely to change anytime soon. In January 2020, the median home price was $290,499 – almost 45% less than what the median home price was in May 2023.
This is good for existing homeowners, who have seen the value of their homes soar during the pandemic. The S&P CoreLogic Case-Schiller index, which tracks home values across 20 cities, shows that even though home values reached a peak in June 2022, they were worth at least 35% more in March 2023 compared with three years prior.
Yet for many buyers, high housing prices have made homes more unaffordable than ever.
Harvard’s Joint Center for Housing Studies in its annual State of the Nation’s Housing report released 21 June estimates that 2.4 million potential homebuyers have been priced out of buying a home with rising costs. Last year, just as mortgage rates were starting to rise, buying a home in a typical metro area required an annual income of at least $67,000. This year, with high mortgage rates, it requires an annual income of $86,000.
Given the economic racial disparities that exist in the US, more Black and Hispanic Americans have been priced out of buying homes compared with white Americans. Between March 2022 and March 2023, the number of white renters who could afford to buy a home fell 30%, according to the report. Meanwhile, the number of Black and Hispanic renters who could afford a home dropped by 39% and 37%, respectively.
“Higher interest rates have just pushed up mortgage payment to price out a lot of prospective homebuyers,” said Taylor Marr, deputy chief economist at Redfin. “Buyers have left the market, but supply has also pulled back significantly.”
Basic economic principles would dictate that when demand goes down, prices also go down. If less people are buying homes because mortgage rates are so high, home prices should be going down. But that is only if supply remains the same, which has not been the case for the housing market. There are 40% fewer homes for sale now compared with before the pandemic, according to Redfin. In the four weeks ending 11 June, the number of homes on the market dropped 6% – the biggest decline during a four-week period in over a year.
Real estate economists see two main phenomena behind the housing supply constraint: a longtime housing shortage meets reluctance from homeowners to sell their homes.
After the housing crisis that triggered the 2008 recession, the number of new homes being built crashed to historic lows. Housing starts, or the figure for new home construction, went from 2.2m in January 2006 to 478,000 in April 2009. Housing starts slowly picked up in the aftermath of the crisis but were still well below the level of construction seen in the 1990s and early 2000s.
Even though construction for new housing picked up during the pandemic, especially as people working from home demanded more space, housing starts began to drop again in May 2022.
“We’re at a point in the housing market where we just haven’t been building housing for a long time, so there’s just no adequate supply,” said Chris Herbert, managing director of Harvard’s Joint Center for Housing Studies. “Even if demand is less, because of the fact that interest rates are so high [and] there’s such a shortage of supply, prices can’t fall.”
Though interest rates are meant to cool demand for housing by making mortgages more expensive, it also has an impact on the supply side. Homeowners who may have put their homes on the market by now because, for example, they wanted to upgrade or move closer to family, have held off because of higher interest rates. More than 90% of US homeowners have a mortgage rate below 6%, according to Redfin, which means their current mortgage is way cheaper than the mortgage they would get if they put their home on the market and tried to buy a new home now. So many homeowners are choosing to sit tight.
“As much as the Fed wanted to control prices by raising interest rates, it also turned the spigot off on supply, which is going to help keep prices high,” Herbert said.
Relief for buyers will probably not come until the Fed lowers interest rates, and officials have said that, if anything, they plan to continue to raise rates this year. Though the Fed has been trying to tamp down prices across the economy, it seems with the housing market, the best that can happen is some sort of stabilizing of prices, which will remain above their pre-pandemic levels.
“Now it’s sort of a holding game where rates are elevated, sellers are waiting, buyers are frustrated and waiting,” Marr said. “I just don’t think much is going to change until next year.”
