The Housing Market Is Stuck in Neutral. Why Home Prices Must Fall for Things to Change

An image of homes under construction is used to illustrate an article about the housing market. Credit: Jim Watson/AFP via Getty Images
Completed and under construction new homes are seen at a site in Trappe, Maryland, on Oct. 28, 2022. New home sales in the U.S. dipped in September, official data showed, as worsening affordability nudges ownership further out of reach for many. Sales soared during the coronavirus pandemic as Americans snapped up homes on the back of bargain mortgage rates, but the sector has cooled with the Federal Reserve hiking lending rates as it fights to bring down surging inflation.
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Housing demand has dropped, but supply is returning. When will the housing market find its balance? 

The number of active home listings in October was up 33.5% year-over-year, the highest level since 2020, according to data from Realtor.com. However, actual home sales have declined almost everywhere, dropping 23.8% year-over-year, according to the National Association of Realtors (NAR). 

High prices and rising mortgage rates are pushing homebuying out of reach for many, particularly first-time buyers. It will stay that way until prices or mortgage rates drop and the market comes back to balance.

In effect, this is what the Federal Reserve is trying to do by raising interest rates to bring down inflation. By making it more expensive to borrow money, demand for buying things like houses should go down, and prices with it. But at the moment, things are at a standstill. 

“The housing market was very overheated for a couple of years after the pandemic as demand increased and rates were low,” Fed Chairman Jerome Powell said this week. “The housing market needs to get back into balance between supply and demand.” 

While the Fed’s rate hikes affect all parts of the economy, homebuyers are being hit particularly hard. 

“In an environment where the Fed raises rates, like they’ve done in the last few months, mortgages are becoming more and more unaffordable,” says Shang Saavedra, personal finance blogger at Save My Cents, LLC.  “And so, we’re starting to see demand dropping off, home sales coming down, and rents going up.”

The Fed’s efforts to cool inflation are ushering in a less competitive housing market. After two years of low inventory and high demand, rising mortgage rates have buyers pushing pause. This cutback in demand means days are numbered for the intense sellers’ market. 

What the Fed Rate Hikes Mean for the Housing Market 

The Fed’s decision to hike its rate by 75 basis points came after the Consumer Price Index reported inflation at 8.2% year-over-year in September. That’s still well above the Fed’s target of 2%. 

During Wednesday’s press conference, Powell signaled the aggressive rate-hiking regime will continue into 2023, saying it was too early to discuss a pause in increases. 

“Borrowers can expect rates to keep increasing for the foreseeable future,” says Vikram Gupta, executive vice president and head of home equity at PNC Bank. “They went up 75 basis points yesterday. They’ll likely go up 50-basis-points in December.” 

With homebuyers facing pressure from both high prices and mortgage rates, something has to give. And based on the Fed’s messaging, it’s not going to be mortgage rates. 

“Consumers tend to buy on payment, not price. If I wanted to buy a house right now, with mortgages at 7% or 8%, I’m not going to be able to afford it because prices haven’t come down yet,” says Karl Wagner, partner at Biondo Investment Advisors. “What we need is for the housing market to correct.” 

When Will the Housing Market Balance Out?

In short: Eventually. 

In a rising rate environment with no end in sight, fewer potential homebuyers are able to even get into the housing market. So while there are more houses on the market than we’ve seen in recent years, they’ll be staying there longer. 

“Our belief is that the level of home price growth is going to slow as we head into the next year. We actually think home prices will come a bit in some markets, and that’s in response to the level of demand pulling back and the level of supply increasing,” Ali Wolf, chief economist at Zonda, a housing data firm, told us in August. 

“We’ve seen demand for housing just crater,” says Christine Cooper, chief economist at CoStar, a real estate analytics provider. “We’re going to reach a different equilibrium.”

An increased supply of houses met with decreased demand from homebuyers means prices will have to drop. 

“The reason why they haven’t gone down faster is because there’s still so much pent up demand from the last few years that they’ve been able to maintain high prices,” Gupta says.

Making the Right Homebuying Decision for You

Experts recommend against trying to time the housing market. Mortgage rates are likely to stay at higher levels well into 2023, if not longer. 

“You’re going to have to shift your mindset. If you’re planning to do a home purchase, pretty much plan on higher interest rates. So maybe, right now is the time to lock in even though it does seem like interest rates are high right now,” says Shannon Grey, CFP and founder of InvestEdge Planning, a financial planning firm in San Diego, California.

While we’re not in a buyers’ market yet, potential homebuyers have more bargaining power now than this past summer. Thanks to a less competitive market, you won’t have to waive contingencies, like inspections or appraisals. You may also be able to ask for the seller to buy down your mortgage rate using points

Pro Tip

Higher interests on mortgages and other loans also mean higher interest rates for savings accounts and CDs. If today’s housing market is out of reach, now is a great time to save for your down payment.

Be Patient

After nearly a decade of low interest rates for mortgages, homebuyers understandably have some sticker shock. However, it very well could be the case that mortgage rates above 5% are the “new normal.” 

“In a market where mortgage rates are well above where they were at the beginning of the year, a common phrase thrown around is, ‘Marry the home. Date the rate,’” says Wolf. “Your home price is stuck with your purchase. Your rate, however, is not.” 

If mortgage rates drop, you can refinance to a lower rate. 

If you’re waiting for rates to come down before buying a house, you can expect to be waiting a long time. It’s more likely we’ll see home prices decline first. 

“There’s a lag effect when it comes to these changes percolating through the system. Consumer behavior doesn’t change overnight just because rates do,” says Gupta. 

In this rising rate environment, it’s a tough time to buy a house. However, rate hikes from the Fed are good news for your savings accounts and certificates of deposit (CDs). With interest rates for many high-yield savings accounts at 2% or higher, it’s a great time to save for your down payment.