Housing Market Trends: What’s Happening With Mortgage Rates And Housing Prices Right Now?

Key Takeaways

• Home prices are most likely to hold over the next year according to Goldman Sachs, though they have inflated by 43% since before the pandemic.
• The Fed’s rate hikes have made borrowing money more expensive, and rates are only expected to get higher over the next 12 months.
• If you must purchase a home over the next year, rates are likely to be lower now than they will be in the coming months.

Over the past two years, the housing market has experienced extreme demand and limited supply, which has led to massive price hikes over a short period.

At the same time, inflation has ballooned across the world – including here in the U.S. To get inflation under control, the Federal Reserve started raising interest rates in March 2022, making borrowing more expensive on top of higher base prices.

How is today’s landscape different from two years ago?

In 2020, the average list price on an American home was $374,500, with average interest rates on 30-year mortgages sitting at 3.11%.

Today, the average interest rate is 7.06%, with average home prices up to $525,000.

That means if you purchased a home two years ago with a 30-year mortgage and 20% down, the average purchase would have cost you $536,551 in principal and interest over the course of your loan.

The average purchase in the current market would cost you $1.11 million in principal and interest over the course of a 30-year mortgage with 20% down. That’s a difference of over half a million dollars by the time you’re done paying off your mortgage.

Interest rates are higher today because the Federal Reserve is attempting to curb inflation. Prices are higher for a few reasons. First, the U.S. was in a housing shortage prior to the pandemic. This put us in an already bad position when things took a turn for the worse.

During the pandemic, many white-collar workers decided to relocate with the newfound freedom of remote work. Many moved to less expensive locales. This also increased demand and drove up prices via bidding wars.

Are home prices going down?

It’s early yet to decide if home prices are on a downward trend. While home prices tend to have a seasonal downward shift as summer wears on, this year the numbers were larger than the average. Usually we see a decrease of 2% from June through August, but this year that decrease was 6%. Seems promising for would-be buyers.

Still, it’s important to look at these numbers in context. In August 2022 prices were 7.7% higher than they were at the same time in 2021. From a longer-term perspective, home prices could still be rising. We’ll have to wait to see the Fall and Winter numbers to have more definitive answers.

Prices remain so high because there is a shortage of inventory. While new builds did increase 12.2% in August, we can attribute this partially to supply chain issues. Many builders were unable to get the supplies they needed to work on their projects, and many of these supplies finally made it to them at the tail end of summer in one big burst.

Just because we saw new builds go up last month doesn’t mean they’re going to increase inventory for American families. The bulk of the increase in inventory will be in the commercial markets, would-be landlords looking to rent new units to tenants.

Many Americans have been priced out of the market as home prices have skyrocketed over the past two years. That means there is more demand in the rental market than usual, so that’s where developers have been focusing their energy. If we look at multi-family housing projects with five units or more exclusively, new builds skyrocketed, up 28.6%.

Another reason this temporary uptick shouldn’t be interpreted as a cause to relax is that permits for future home building projects were down 10% at the end of summer. As we look forward, we can expect to see even tighter inventory in the affordable housing market as a result, even as homes at higher price points sit on the market for months at a time.

With less demand at higher price points, fewer potential sellers are eager to list. The opportunity that was there last year has diminished, with homes sitting on the market longer. Sales on homes listed between $250,000 and $500,000 fell 14% from 2021 to 2022, partially because there’s less inventory in this price bracket with rising home prices.

But sales on more expensive homes were down, too. Those with list prices between $750,000 and $1 million were down 3%.

Higher prices and less affordable inventory aren’t the only reason people have slowed on home buying in 2022, though. There’s also the issue of federal interest rate hikes.

Are mortgage rates going up further?

Starting in March 2022, the Federal Reserve started raising interest rates. That makes borrowing – including borrowing via a mortgage – more expensive.

On Wednesday, Sept. 21, 2022, the Fed announced another rate hike of 0.75 percentage points. That makes the current federal funds rate 3% to 3.25%, and it is only expected to rise. We’re likely to see another two rounds of hikes totaling an additional 1.25 percentage points by the year’s end.

The Fed is currently hinting that rates could rise as high as 4.6% in 2023.

Estimates as of early October, 2022 put the average rate on a 30-year mortgage at 7.06%. While it’s reasonable to expect rates to shoot up even higher, just how much higher remains to be seen.

Increased borrowing rates don’t just discourage buyers – they discourage sellers from even listing their properties in the first place, further compounding the supply-side shortage. Many of these sellers would presumably be taking out new mortgages when they sell their old home.

Most Americans with a mortgage secured rates when they were lower than 6%, so listing their property could mean increasing their financing costs on any new property.

Should I buy now or wait longer?

It’s conceivable that buying sooner rather than later could save money on interest rates. But it’s tough to see how a buyer, especially a first-time home buyer, wins in this market.

While we’re seeing short-term pricing decreases and long-term pricing increases, Goldman Sachs actually predicts pricing to stay the same through 2023, with a 0% average increase or decrease. While regional decreases may occur, national averages are expected to stay right about where they are now.

Whether prices go up or down is going to be highly variable depending on your local market.

There may not be a nationwide pricing increase, but rates are highly likely to rise throughout 2023 – until the Fed hits 4.6%. After that, rates may stay high for a while or be pulled back down, depending on how inflation looks. It’s near impossible to predict what supply and demand will look like at that point.

If you don’t need to move right away, you might decide to wait until 2024 or whenever the Fed starts lowering rates again. There is more risk and uncertainty on the pricing equation that far out.

Bottom line

List prices on homes remain high. Interest rates are expensive for mortgages – the last time we saw rates this high was the early 2000s. But borrowing is extremely likely to become even more expensive over the next 12 months, making the decision even more difficult for those who may need to buy within the next year.

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