Over the past few months, there has been what can best be described as a correction in the housing market, following repetitive interest rate hikes that began last year and continue today. But a recent report from the Case-Shiller National Home Price Index indicates an uptick of 0.15% between January and February of 2023.
After months of correction, the recent uptick in home prices has provided buyers and sellers some hope in a looming rebound in the market.
What are the factors driving the recent housing correction?
The primary cause for the decline in national home prices during the latter half of 2022 can be directly attributed to the affordability of buying homes, namely home financing. Mortgage rates spiked from 3% to over 6%. This occurred just after average U.S. home prices surged by 41% during what is being titled the Pandemic Housing Boom. These growth levels were unsustainable, and with interest rates making it more than twice as expensive to finance a home price, it is no wonder prices took a dip.
Many buyers can no longer qualify for the loan amounts they could a year ago. Additionally, we are seeing homebuyers delay purchases out of concern for a potential economic downturn. Fewer homes are selling, bidding battles occur less frequently and offers above asking have decreased. It’s a new market. To attract buyers, numerous sellers have been compelled to reduce their asking prices for their homes.
What's Driving the Slight Increase in Home Price Now?
While homebuying is still challenging, there’s no denying that home prices have seen a slight uptick, indicating that property price drops across the country may have stabilized.
Declining Mortgage Rates Improve Affordability
The mortgage interest rate is one of the most important factors influencing the affordability of home ownership. Fortunately, mortgage rates are also beginning to stabilize. Furthermore, with inflation falling, economists believe mortgage rates will begin dropping by the end of the year. Those who were previously priced out of the market may soon be able to purchase a property.
However, as buyers re-enter the market, inventory presents the most significant problem.
Why is there a shortage of inventory?
According to Lindsay McLean, co-founder and CEO of HomeLister, “Many sellers hold low-interest-rate mortgages and are not under pressure to sell and so may hold out for the offers that they want.” Furthermore, homeowners hesitate to sell as most of them hold very attractive mortgage rates. Two-thirds of all mortgaged properties have first-lien interest rates of 4% or less, and 50% have rates of 3.5% or less, which is 3% below the current market rate. For many, if they were to sell their current property, they would be unable to get a loan for the same amount due to current mortgage rates.
The combining factor of mortgage rates has contributed to a double-digit decline in housing inventory over the past months.
Selma Hepp, the chief economist at CoreLogic, recently stated that while the housing markets vary across markets and price tiers, lower mortgage rates and low inventory have been instrumental in maintaining home prices.
States that posted a home price increase include Eastern markets like Cleveland, Charlotte, and Washington, D.C., while Western markets like Phoenix and Las Vegas continue seeing housing prices decline.