What’s really going on in the housing market?

The media would have you believe that the housing market is either living on a ventilator or is still viable because of the inventory shortage. What’s really going on? The answer is both.

Most homeowners have been reluctant to trade up or down or relocate and give up their record-low mortgage rates. But several people don’t have mortgages. In 2021, 42 percent of all owner-occupied homes in the U.S. were owned free and clear, up from 34 percent in 2011. A 2022 OECD (Organisation for Economic Co-operation and Development) study of 28 countries found the U.S. had the third lowest percentage of households that owned their homes “free and clear” with no mortgages as “outright owners.”

It’s not exactly smooth sailing for sellers, either. While they’re still in the driver’s seat thanks to the worsening housing shortage, they cannot command the high prices of just a year ago. Buyers can’t afford to offer as much now that higher rates have resulted in substantially larger mortgage payments due each month.

The biggest challenge confronting the summer housing market is there aren’t enough homes for sale. The number of new listings is down 25.7% from June 2022 and down 28.8% from June 2019, according to Realtor.com® data. And while there are technically more homes for sale than a year ago, some properties just aren’t selling.

Anything appealing and move-in ready in a desirable area that’s priced to move is still selling very quickly.

“Homes are sitting for longer. We’re just not seeing as many homes cycle through the market this year,” says Realtor.com Chief Economist Danielle Hale. “As we move into late summer and early fall, we might see even fewer homes on the market.”

In April, roughly 29% of the homes for sale were new construction, according to Freddie Mac tabulations of Census Bureau and National Association of Realtors® data. That was the highest share of new construction since the data collection began in 1999.

Then there are the rising mortgage rates. Higher mortgage rates have been a primary culprit behind the slowdown in the housing market. The U.S. Federal Reserve wasn’t a fan of the big run-up in home prices during the pandemic. It began raising interest rates to tame inflation and cool the housing market. Mortgage rates followed a similar upward trajectory, supersizing monthly payments. The result: The typical mortgage payment was 91% larger* in June than it was in June 2019 and 9% more than in June 2022, according to a Realtor.com analysis.

Higher mortgage rates have chilled the housing market. Scores of prospective homebuyers have been priced out, turning the American dream of homeownership into nothing more than a dream for many would-be first-time homebuyers. And rates are expected to remain high.

All this means that, in some markets, prices are falling.

List prices fell nationally for the first time in years in June, dipping 0.9% from last June’s record high. That’s insufficient to give most homebuyers any meaningful relief as mortgage rates remain high. And those price declines aren’t universal. Prices fell in the most expensive parts of the country, generally in the West and in the areas that boomed during the pandemic, such as the South. However, they’re still rising in the cheaper Midwestern and Northeastern markets.

Exactly how much prices will go down depends on who is asked. Realtor.com expects prices will be 0.6% lower this year than last. Zandi of Moody’s Analytics expects home prices to continue to drop, falling 8% from last year’s peak. 

So what’s going to happen?

The lack of homes for sale will likely keep the market competitive. Buyers with their hearts set on a property will likely have to compete. And they might have to offer more than the list price to win the bidding war. Existing homes received about three offers each, with the “vast majority” going under contract in under a month, says NAR’s Lautz. (Existing homes do not include new construction.)

So what are buyers and sellers to do?

1ne: If you’re waiting for interest rates to drop, it will be a 1-2 year wait, and by that time, the home you want will probably be gone.

2wo: Sellers should not panic and have to be prepared for the right buyer, but they also should expect an offer of 1-5% off the listing price.

3hree: Pay as much in cash as possible to keep mortgage payments low. You may be able to recover cash when you refinance at a later date.

4our: Ask the sellers if they will help subsidize higher mortgage rates with a point off via cash.

5ive: Ensure you have a good realtor who understands your needs and doesn’t waste your time showing you homes that aren’t your style or above your budget.

If I had to guess, the FED will raise interest rates again as items like new car sales are still solid. Waiting for that home you really want may lead to a huge disappointment as it’s sold.