The real estate market has been all over the place lately. On the one hand, home prices have fallen year over year, while the number of homes for sale declined in July, according to Realtor.com’s latest housing data. Still, prices of homes remain near record highs, while mortgage rates have steadied slightly but are still hovering in the 6% to 7% range.
Some economists think that the housing market may be stuck in the in-between, with prices still rising despite an overall yearly decline coupled with a decline in inventory.
So, what does that mean for real estate investors and the market overall?
Why Are Real Estate Prices Still High?
While the national median listing price declined slightly in July, mortgage rates have kept purchasing costs high, according to Realtor.com’s July housing report. The national median list price dropped to $440,000 in July from $445,000 the month prior. It’s also down 2% from a record high of $449,000 in June 2022.
But just because prices have dropped slightly, buyers haven’t felt much relief. That’s because mortgage rates have increased the monthly cost of financing a home by 17.5% compared to a year ago. This has outpaced both wage growth and inflation and has made it difficult for first-time homebuyers to afford to buy.
“High costs continue to be a stumbling block for some buyers, weighing overall demand,” Realtor.com chief economist Danielle Hale said in her analysis
And with the Federal Reserve raising rates in July, it’s likely it contributed to mortgage rates staying steady. However, the Fed has signaled it’s unlikely to increase rates again in 2023, so whether that will cause some relief for mortgage rates has yet to be seen.
Another factor driving home prices? The limited number of sellers on the market. With inventory falling, it’s led to “pricing power” for sellers, Hale said.
“With mortgage rates still high and buyers cost-sensitive, the limited number of sellers on the market may be sensing their advantage and pricing accordingly,” she said.
The Housing Stalemate
Housing inventory is also down, with new listings in the 50 largest metro areas in the U.S. falling 12% compared to last year and 46% below pre-pandemic levels. And while the supply of new homes has risen slightly, it’s still slumped year over year.
With fewer homes, high real estate prices, and increasing mortgage rates, it means housing sales are stagnating. The typical home spent 45 days on the market in July, 11 days more than the same time last year.
Still, homes are being sold faster than before the pandemic. Hale says it’s possible that this could change in the coming months, and homes start selling faster than they were a year ago.
“If so, that would mean that the market is settling into an in-between state, where homes sit on the market for fewer days than pre-pandemic but somewhat longer than was common during the height of the real estate frenzy,” she said.
Where Is the Real Estate Market Heading?
So where is the real estate market headed? It’s impossible to tell the future, but some real estate experts have made a few predictions.
Dave Meyer, for example, thinks that the housing market will end the year mostly flat, or somewhere between 3% and -3%, due to a lack of economic incentive to sell. And with mortgage rates staying at their current rates, it’s likely that demand for housing will continue to stay flat as well. We’re seeing this flatness now with a decline in mortgage applications.
Of course, it’s possible prices decline steeply if there’s a massive shift in the economy, such as increased layoffs and unemployment, or if mortgage rates suddenly skyrocket due to rising bond yields. Another scenario is that housing prices continue to jump if the Federal Reserve pauses rate hikes and mortgage rates drop.
Overall, the housing market is expected to stay strong for the next few years, with Zillow forecasting prices will continue to rise due to a low housing inventory.
The Bottom Line
Although housing prices have declined slightly in the last few months, rising mortgage rates have kept demand for real estate down. With inventory down as well, housing sales have stagnated and remain on the market longer than in 2022.
While we have yet to see what the means for the future of the real estate market, it’s possible that prices will stagnate but remain strong in the coming years.
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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.