In the current real estate landscape, a notable shift has occurred. Despite the enduring price resilience in many regions, including “Zoom towns” like Boise and Austin, the broader national market has resisted a downturn. For seven months in a row, the S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index, a benchmark for property values spanning over three decades, has reported growth in existing-home prices. To date, prices have escalated close to 6% annually, and 2.6% from the previous year, surpassing the median annual increase recorded over the index’s history.
However, October marked a turning point, revealing a fissure among sellers. The convergence of escalating mortgage rates and home prices has not only burdened buyers but sellers as well. Despite a scarcity in existing home inventory, an unprecedented number of sellers reduced their listing prices in October, as per a recent Redfin report.
Approximately 7% of homes for sale in the U.S. experienced a price cut during the four weeks leading up to October 29, the highest proportion since Redfin began monitoring in 2012, and significantly above the 3.6% average in a typical month. This 11-year peak coincides with mortgage rates stabilizing between 7.5% and 8% over the past month, the highest in two decades. It’s noteworthy, though, that despite the recent price reductions, home prices are still 3% higher than the previous year, according to Redfin data.
Mortgage rates have predominantly escalated this year, peaking at around 8% in October. A brief dip to 7.4% occurred following a disheartening jobs report, but rates are inching back towards 8%. Economists and real estate specialists anticipate that mortgage rates will hover around 8% for the forthcoming years.
The surge in rates has compelled some sellers to decrease prices to compensate for the increased monthly mortgage payments buyers are facing. A report from Black Knight indicates that nearly a quarter of new homeowners are shouldering mortgage payments of at least $3,000 per month, a significant burden given the average American’s monthly income of $4,600. This financial strain has resulted in a dramatic 15% year-over-year decline in existing-home sales activity in September, a “deep freeze” that Zillow had previously forecasted in May.
Matthew Walsh, a housing economist at Moody’s Analytics, conveyed to Fortune that sellers must reduce prices to balance the higher payments and maintain buyer interest in a market with a shrinking pool of buyers.
For the housing market to regain momentum, either mortgage rates must decrease or home prices must fall, according to Chen Zhao, Redfin’s research lead. Without these changes, the market will only experience sluggish growth over an extended period as the lock-in effect gradually diminishes and affordability slowly improves. Zhao suggests that rates could decline if the Federal Reserve successfully curtails inflation or if there are clear signs of an economic recession.
The climbing mortgage rates and home prices have eroded buyer demand, particularly among millennials and others in the prime homebuying demographic, sidelining potential buyers. Redfin’s October report highlights that a prospective homebuyer now requires an income of $114,627 to afford a home, marking a 15% increase from the previous year and setting a new record for the annual income needed to comfortably purchase a property. This is problematic considering the median household income was $74,580 in 2022, which is about $40,000 less than what is now required.
Realtors and economists are predicting a continued decline in home prices through the end of 2023. Adie Kriegstein, a real estate agent with Compass Real Estate in Manhattan, has been advising her clients that sellers are seeking last year’s prices while buyers are anticipating next year’s prices. With a slight increase in housing supply in New York City during the last week of October and fewer transactions occurring, Kriegstein expects price reductions to persist through the winter.
Moody’s Analytics forecasts a 4.5% decrease in home prices over the next two years, despite the low inventory. With the anticipation of sustained high rates and low demand extending into 2024, the housing market, after experiencing two years of double-digit price growth, remains overvalued, and affordability is at a near four-decade low. Consequently, sellers are expected to yield on listing prices.