Home sales are slow. Does this mean house prices will fall?
As potential homebuyers wait for mortgage rates to fall and push back the spring buying season, some home sellers are lowering their asking prices. Nearly 7% of sellers lowered their asking prices in June, the highest percentage since November 2022, according to Red fin.
While this is the first time since the pandemic that homes have sold below asking price in the spring, many buyers are still priced out of the market.
Overall, it’s been a slow season, with high mortgage rates and prices continuing to dampen buyer demand. In May, home sales fell 2.8% year-over-year, according to the National Association of Realtors.
The housing market is struggling to get going, said Odeta Kushideputy chief economist at First American Financial Corporation. “Higher mortgage rates negatively impact both supply and demand — pricing out buyers who are losing purchasing power and locking in potential sellers,” Kushi said.
But some highly motivated sellers have become more flexible with asking prices to attract buyers, especially in areas where property insurance has skyrocketed, such as Florida, said Erin Sykeschief economist at Nest Seekers International.
Now that house prices are rising less rapidly and the supply of homes is increasing, buyers are finally getting more choice and better affordability.
Could house prices fall as sales slow this summer?
It’s common to see a surge in home sales in the spring and early summer, when warmer weather and the end of the school year make it a practical time for families to move. In recent years, however, it hasn’t been so typical.
Mortgage rates and home prices are too high, leaving potential homebuyers in hibernation. According to Lawrence Yun, chief economist at the NAR, home sales have barely improved since last year and are still at a nearly 30-year low.
At the end of May, mortgage applications were 10% below last year’s pace, the Association of Mortgage BankersHomeowners who need to sell their homes quickly have little choice but to adjust their asking price to attract buyers.
That means the housing market could slowly start to return to equilibrium after a tumultuous few years. Inventory levels are gradually improving across the country as homes stay on the market longer, which could make for a slightly less competitive housing market through the rest of 2024.
“It’s still a seller’s market, but by the end of the year there could be a more balanced situation,” Yun said.
While we’re not in a buyer’s market yet, potential homebuyers have more negotiating power than they did a few years ago. You probably won’t have to forgo things like inspections or appraisals, which were common during the pandemic. You may also find some flexibility around asking prices.
“Home prices have become more negotiable in recent months,” Sykes said. Coastal markets in Florida and New Jersey are already showing 5% to 10% more negotiability on asking prices, she said.
Factors Influencing the Current Housing Market
The current affordable housing crisis is being caused by a combination of factors, including higher borrowing costs, rising house prices and a limited supply of housing.
Mortgage interest is high
High mortgage rates have plagued the housing market for more than two years. In early 2022, the average rate on a 30-year fixed-rate mortgage was close to 3%. Since then, it has risen significantly (even to over 8% last fall) in response to high inflation and a series of Federal Reserve rate hikes.
Mortgage rates averaged above 7% throughout the spring, according to data from CNET sister site Bankrate. Here’s how rising mortgage rates affected monthly payments on a $400,000 home with a 10% down payment.
| 30-year fixed mortgage rate | Deposit | Monthly mortgage payment | |
| Loan A | 3% | 10% | $1,851 |
| Loan B | 7% | 10% | $2,728 |
House prices are still high
During the pandemic, there was a huge demand for homes, but the supply couldn’t keep up. As a result, bidding wars became the norm and home prices rose by more than 40%, according to the Zillow Home Value IndexSince then, price growth has slowed but not reversed.
“The combination of somewhat better supply and demand, tempered by higher rates, has helped to soften the price increases,” he said. Keith Gumbingervice president of the mortgage site HSH.com.
Housing shortage persists
The current high interest rates are not helping to solve the national housing shortage, which is entering its second decade. Most potential home sellers have existing mortgage rates below 5%, so they are reluctant to move to a new property with a higher interest rate. As mortgage rates fall, more homes are likely to come onto the market.
The other piece of the inventory puzzle is new construction. While we’ve seen one of the best years ever for new construction in 2022, there’s a shortage of about 4.5 million homes, according to Zillow.
What can we expect from the housing market for the rest of 2024?
There are a lot of moving parts: mortgage rates, inventory, house prices, and they are all interconnected.
The first domino to fall will likely be mortgage rates. With inflation slowing and the Fed set to cut interest rates later this year, mortgage rates should improve. Most economic forecasts call for the average interest rate on a 30-year fixed mortgage to be between 6% and 6.5% by the end of 2024.
Lower borrowing costs should encourage more sellers to list their properties and (ideally) lead to an increase in new construction. This is already happening: 90% of markets have seen inventory levels improve year over year, according to Black Knight. The biggest increases were in Florida, as well as Austin and Denver.
With more supply on the market, Yun expects home price growth to stabilize at around 2% to 3% year-on-year.
While a sudden drop in mortgage rates would encourage many buyers to come off the sidelines, it would not immediately solve the housing shortage. In fact, buyers flooding the market to compete for limited inventory could cause house prices to rise again. Ideally, house prices and mortgage rates would move at the same pace toward equilibrium. However, this will continue to depend on several economic factors. If the labor market slows and unemployment rises significantly, demand for housing could fall, leading to lower prices. Political policy could also play a role, especially with a general election coming up this year.
Should you wait to buy a house?
Buying a home is a huge financial (and personal) decision, and many people aren’t sure if it’s the right time. Even if you ask a real estate agent whether you should wait or buy a home, it’s an impossible question to answer.
Experts advise against trying to time the housing market. It’s better to base your decision on your own personal and financial circumstances. Here’s what to consider:
How is your creditworthiness? The higher your credit score, the more likely you are to get a lower interest rate on your future mortgage. Even a difference of a few tenths of a percentage point can save you tens of thousands of dollars in interest in the long run, making homeownership more affordable.
Do you have a stable income and job security? Without a stable income, it can be difficult to comfortably pay your monthly mortgage payments and the other costs of home ownership.
How long do you expect to live in your home? Home values tend to increase over time. The longer you stay in your home, the more you benefit from that appreciation. Many homeowners rely on the equity they’ve built up by paying down their mortgages and letting the value of their home increase to finance the down payment on their next home.
Do you have an emergency fund? Before you take out a mortgage, experts recommend creating an emergency fund that can cover several months of living expenses (including housing costs) in the event of a medical emergency or job loss.
