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Mortgage Rates Rise Yet Again—Does That Mean Home Prices Might Fall?

With mortgage interest rates hitting record highs not seen in decades and quickly approaching 8%, many might wonder: How much more does it actually cost to buy a house today?

According to a new report, the monthly cost of financing 80% of a typical home jumped by $166 in October compared with this same month last year.

Do the math, and this means that today’s homebuyers must cough up $2,405 per month for the privilege of owning a house. And in order to comfortably afford those mortgage payments, a homebuyer would need an annual salary of $119,500—nearly double the actual median household income of $64,240.

In other words, the typical American makes only about half as much as they need to afford a home today.

Sky-high mortgage rates aren’t the only metric keeping real estate in a prolonged affordability crunch.

Despite high mortgage rates, home prices aren’t budging much, with the median list price in October hovering at $425,000. That number has remained more or less stable compared with this same time last year.

Listing prices have been buoyed by scarce inventory.

The one upside for buyers is that home prices are declining seasonally, down from $430,000 in September. They’re also down from their all-time high of $450,000, in June 2022.

Why low housing inventory keeps prices higher than usual

The overall number of homes for sale in the U.S. sank by 2% in October compared with this same month last year. That percentage might not seem dramatic at first glance, but this scarcity of listings is downright shocking when compared with pre-COVID-19 levels from 2017 to 2019, which boasted 42.4% more homes for sale.

As for fresh listings, those were also down by 3.2% in October, compared with last year.

A growing number of buyers are turning to purchasing new construction.

“New-home sales have been increasing. However, “construction activity isn’t elevated enough to fully bridge the low inventory gap.”

The housing inventory outlook

So, when can buyers expect to see a substantial increase in new listings and active inventory overall?

“That is the trillion-dollar question in housing right now, who expects it will be “quite a bit longer before buyers can see a large increase in new listings and the number of homes for sale.”

The delay all comes down to sellers who feel “locked in” to their much lower mortgage rates of just a few years earlier.

“Because so many homeowners either purchased their home or refinanced their mortgage during the pandemic period, when interest rates were low, their homes are likely still a very good fit for their needs and quite affordable. “Especially relative to the cost of buying at today’s mortgage rates.”

Motivated buyers are pouncing

In a surprise twist, the cruel combination of steep mortgage rates, high home prices, and scant listings doesn’t mean buyers can take their time making an offer. Instead, the opposite is true: Today’s buyers must act relatively swiftly when they spot a great home.

“Homes spent 50 days on the market, which is one day shorter than last year.

In fact, the average home spent 16 fewer days on the market than the pre-pandemic average for October from 2017 to 2019.

And although time on the market typically lengthens as we approach the holidays, “Time on market is rising more slowly this year than is typical during the fall season, as still-limited supply spurs homebuyers to act quickly and newly listed homes make up a greater share of low remaining inventory.

Where home prices are softening

The Federal Reserve held rates steady at its meeting on Wednesday, but it left open the possibility that more rate hikes could occur if inflation doesn’t keep coming down.

Until mortgage rates subside, today’s real estate market can be best described as a financial bully, grabbing homebuyers by the ankles and shaking every last nickel out of their housing budget.

Yet all real estate is local, and America’s 50 largest housing market metros do show some pockets of hope for homebuyers.

In the bad news column for buyers: In October, real estate listings in the top 50 metros dropped 6.7% compared with the same month last year, while the collective inventory across these areas is now 38.4% below pre-pandemic levels. (Metros include the central city, surrounding towns, suburbs, and smaller urban areas.)

But in the good news column? While overall home price reductions were still below last year’s levels in all four regions of the U.S., some of these metros were seeing sellers slash prices.

Indeed, “13 of the 50 large metros saw the share of price reductions increase compared to last October, predominantly in the South and Midwest.

The cities with the greatest increases in the share of price reductions are St. Louis, at 4.2%; Oklahoma City, OK, at 3.4%; and Memphis, TN, at 3%.

While lower than last year, the share of price reductions rising could signal a softness in prices in the coming months.

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