The housing market in the United States has experienced a prolonged period of growth, with home prices refusing to drop. According to the S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index, existing-home prices have increased for the seventh consecutive month. Year-to-date, average U.S. existing home prices have risen by nearly 6%, surpassing the median full calendar year increase over the past three decades.
However, a crack in the market appeared in October, and it was among sellers. The challenges of soaring mortgage rates and home prices are now impacting sellers as well as buyers. Despite limited existing home inventory, a record number of sellers reduced the prices on their listings in October, as reported by Redfin.
During the four weeks ending October 29, almost 7% of for-sale homes in the U.S. posted a price drop, the highest portion since Redfin began tracking this data in 2012. This figure far exceeds the average monthly rate of 3.6% of homes lowering their prices. It is important to note that even with these drops, home prices are still up 3% year-over-year.
Mortgage rates have also been on the rise this year, reaching a peak of around 8% in October. Although rates briefly dropped to 7.4% in reaction to a disappointing jobs report, they are slowly climbing back towards 8%. Economists and real estate experts anticipate that mortgage rates will remain around 8% for the next couple of years.
The high rates have forced some sellers to cut prices to compensate for the increased expense buyers face in monthly mortgage payments. Redfin reports that almost a quarter of new buyers are paying at least $3,000 per month for their mortgages, which is unaffordable for most considering the average monthly income of $4,600 for Americans. This has resulted in a significant drop of 15% in existing-home sales activity in September.
Matthew Walsh, Moody’s Analytics’ housing economist, explains that sellers need to lower prices to counteract higher payments and maintain buyer interest in a market with fewer buyers.
For the housing market to regain momentum, mortgage rates need to decrease or home prices need to drop, according to Chen Zhao, Redfin’s research lead. Otherwise, transaction growth will be slow over an extended period of time.
The lack of affordability due to rising mortgage rates and home prices has diminished buyer demand, especially for millennials and others in prime home-buying age. Redfin reports that a prospective homebuyer now needs to earn $114,627 to afford a home in the current market, a 15% year-over-year increase and the highest income required to comfortably buy a home on record.
Realtors and economists anticipate that home prices will continue to drop until the end of 2023. Despite low inventory, Moody’s Analytics predicts a 4.5% decrease in home prices over the next two years.
Adie Kriegstein, a real estate agent in Manhattan, expects price cuts through the winter due to fewer deals happening and sellers adjusting quickly to market trends. Moody’s Analytics also suggests that sellers will capitulate on list prices as the housing market remains overvalued and affordability reaches a four-decade low.
Overall, the housing market faces challenges as both buyers and sellers grapple with soaring mortgage rates and home prices. The market will need to see a decrease in rates or prices to stimulate transaction growth and improve affordability.
