Home prices have continued their seemingly inexorable rise, despite America’s housing market purportedly being in the throes of a correction, a slowdown—whatever you want to call it. It’s defying what many experts predicted and, just maybe, conventional wisdom.
Buyers can’t afford these higher prices on top of higher mortgage interest rates. Deals are falling through. Bidding wars are drying up. Six-figure offers over the asking price are going the way of the dinosaurs. So how is it possible that median home list prices were 15.9% higher in the week ending July 9 than they were a year ago, according to Realtor.com® data?
The disconnect appears to be that home sellers have yet to adjust to this new reality—the one where they can’t slap whatever price they’d like on their properties, sit back, and wait for the bidding wars to commence. Surging mortgage rates have made it impossible for many buyers to afford what they could have just a few months ago.
Meanwhile, record-high home prices are up more than 31% over the past two years, according to Realtor.com June list price data. And they keep rising. Something seems like it needs to give.
“Prices adjust really slowly,” says Realtor.com Chief Economist Danielle Hale. “Sellers are shaped by recent experiences. Before we see prices start coming down, we’re going to have to see sellers stop shooting for the moon.”
And just because sellers are asking for more money, it doesn’t mean they’re getting it. Buyers are negotiating. The number of price reductions on properties doubled in June compared with a year earlier.
Last month, about 11% of builders dropped prices on newly constructed homes, according to building consultancy Zonda. An additional 70% kept them flat compared with May.
“Real estate markets freeze when you see a big change in mortgage rates or the economy,” says Mark Zandi, chief economist at Moody’s Analytics. “Buyers cannot handle these house prices at these mortgage rates,” he says. “The mortgage payment is just too high for most first-time homebuyers. Trade-up buyers aren’t going to trade up because they’re going to have to get a higher mortgage rate.”
Home prices typically spike in the summer. Larger, more expensive homes go up for sale, and families eager to be settled before the kids start school in the fall compete for them. Plus, there are scores of millennials who are reaching the point in their lives when the idea of homeownership becomes more appealing. But now there still aren’t nearly enough homes for sale, or rent, to go around.
Record-low mortgage rates, which fell into the 2% range last year, allowed buyers to afford higher home prices. The lower rates meant that many monthly mortgage payments remained reasonable, balancing out the extra buyers spent on their properties.
However, mortgage rates have spiked from just about 3% a year ago to the mid-5% range. That’s tacked hundreds of dollars a month onto many mortgage payments. Buyers today are faced with mortgage bills 58% higher than they were just one year ago—when prices were also at record highs—on top of higher inflation, rents, and gas prices. That’s rendered many unable to borrow nearly as much for a home anymore and forced many others out of the market.
“A lot of homeowners are still pricing homes based on the market of six months ago,” says George Ratiu, manager of economic research for Realtor.com. “There is a gap between what homeowners are asking and what they’re getting.”