What happens to home prices? Mortgage rates and narrow supply of factors

Daniel Acker | Bloomberg | Getty Images

Home prices are dropping in most markets across the country.

However, home prices are still higher compared to last year, and they are unlikely to fall very sharply.

The sharp rise in mortgage rates over the past several months has increased the cost of housing for anyone who needs a loan. While this has led to some buyers pulling back, and some sellers cutting back on what they are ordering, strong demand and tight supplies are supporting prices.

Recent reports use monthly comparisons due to a sharp turnaround in the once-hot housing boom, driven by the pandemic. So the changes can seem dramatic.

Black Knight, a real estate software, data and analytics company, reported a second straight month of decline in August, with prices down 0.98% from July. reported an incremental adjustment of 1.05% Monthly drop in July. Combined, these factors represent the largest monthly decline in more than 13 years and the eighth largest since at least the early 1990s, Black Knight said.

“One represented the largest price drop in a single month since January 2009 — together they represent two consecutive months of significant declines after more than two years of record growth,” Ben Grabowski, head of data and analytics at Black Knight, wrote in the report.

“The He added that the only months in which prices fell substantially in one month above what we saw in July and August were in the winter of 2008, after the bankruptcy of Lehman Brothers and the ensuing financial crisis.

Despite all these factors, it is important to remember that real estate is also highly influenced by local economic forces. It’s seasonal too. Families tend to buy larger, more expensive homes in the spring and summer, so they can move between school years. This skews the prices higher. Smaller, less expensive homes tend to sell out in the fall and winter, which leads to lower prices. This is why home prices are usually compared on an annual basis, to get the most accurate reading.

calms me down

Pending home sales fell for the third consecutive month in August

However, brokers note that while home prices traditionally fall from July to August, this year they have fallen at three times the normal speed.

Some markets decline faster than others. According to Black Knight, some of the markets that have seen the biggest drops are some that were previously more expensive, such as San Jose, San Francisco and Seattle. These markets are hardest hit by rising mortgage rates because they were expensive to start with.

Other markets that have seen significant declines are those that have seen the biggest jump in demand during the pandemic, such as Phoenix and Las Vegas. With the ability to work from anywhere, people have flocked to these relatively affordable markets where the climate could be friendlier. This rise in demand fueled prices.

Significant price gains are holding up in Florida markets, which are still seeing strong demand due to the switch in many tech workers from Silicon Valley to Sun Belt during the pandemic.

Tight supply buoys prices

Home prices are not likely to fall as dramatically as they did during the Great Recession caused by the financial crisis because there is much more demand than supply.

Before the pandemic, supplies were low due to a decade of no building after the Great Recession. Angry home buying during the pandemic has exacerbated that shortage. It was the imbalance in demand over supply that drove home prices up more than 40% in just two years.

There are fewer sellers, too. They are seeing the market weaken and some are unwilling to get less of their home than they feel it is worth.

“Currently, potential sellers are dealing with not only lower demand and lower prices due to a sharp rise in interest rates, but they also have a growing incentive to abandon their historically low-rate mortgages in this environment. Some may wait outside the market to see if demand— And the prices — he’ll be back in the spring,” Grabowski said.

There are about three months of supply in the current domestic market, which is about half of what is considered a balanced market. There is more supply in the new home market, but new construction comes at a premium, and buyers today are competing with higher mortgage rates. Affordability remains at one of the worst levels in history, although prices have fallen slightly.

What most experts seem to agree on is that this is not a “normal” housing market or even an ordinary price correction. Inflation, global economic uncertainty, rising mortgage rates, and a meager supply of homes for sale are all factors that influence potential buyers. It remains to be seen to what extent they will retreat and to what extent this decline will reduce prices.

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