Houses Have to Get Cheaper

We want to help you make more informed decisions. Some links on this page — clearly marked — may take you to a partner website and may result in us earning a referral commission. For more information, see How We Make Money.

(This article was originally published in NextMove, our weekly newsletter on the housing market. Sign up for it using the box below.)

The housing market is stuck. And only one thing is likely to get it unstuck: Houses have to be less expensive.

This is Jon Reed with NextAdvisor. Mortgage rates, like fashion trends, are repeating what they were 20 years ago. That means rates are in the 7% range, double what they were this time last year. Experts say rates aren’t likely to come down any time soon. In fact, they could move even higher by the end of 2022.

Let’s talk about the other half of the home affordability equation: prices. Nationwide, they hit all-time highs this summer but have started to drop a bit in the last few months. Still, they’re above where they were a year ago, and way higher than before the pandemic.

The spike in mortgage rates has caused homebuyers – particularly first-time buyers who usually have less cash and rely more heavily on borrowing – to call off the house hunt. That means home sales have slowed from their feverish pace earlier in the year, and the inventory of homes on the market has ticked up slightly.

But those homes are still too expensive for many buyers to afford at today’s rates. So what has to happen next?

Again: Prices have to drop. 

For a short-term solution, sellers are going to have to keep listing their homes lower to find buyers. Price cuts are already becoming more common.

In the longer term, the way we build homes in this country has to change. Years of low interest rates led to people buying bigger and more expensive homes. The market responded by prioritizing those over smaller, more affordable ones. The median size for a newly built home is 2,300 square feet, according to U.S. Census data. In the 1970s, it was closer to 1,600 square feet. 

If high mortgage rates are going to stick around, homebuyers are going to need affordable options, such as smaller single-family detached houses, or more townhomes and condos

The housing market has changed dramatically in just a short time, with home prices and mortgage rates both soaring much faster than normal. If it’s going to find balance, there have to be some adjustments.