For several years now, home buyers have been struggling to find affordable properties to purchase. But whereas mortgage rates held steady at affordable levels from mid-2020 through the start of 2022, over the past five months, they’ve risen sharply.
Now you’d think rising mortgage rates would be driving home prices downward. But that doesn’t seem to be the case.
In March, home prices rose 20.6% anually on a national level, according to the S&P CoreLogic Case-Shiller Home Price Index. That’s higher than February’s 20% gain, which was impressive in its own right.
In fact, the index’s 20-city composite saw a 21.2% annual gain. And for both the national and 20-city composites, March’s gains marked the highest annual jump in over 35 years of data.
When will home prices cool off?
Initially, some housing experts thought home prices would start to come down this year as mortgage borrowing got more expensive. So far, that doesn’t seem to have happened, though. And a big reason boils down to the fact that demand for homes exceeds the supply that’s currently on the market.
Since the latter part of 2020, the housing market has sorely lacked inventory. And because of that, sellers have been able to consistently command higher-than-average prices for their properties. For home prices to come down, inventory needs to catch up to demand — it’s really that simple.
But when will inventory pick up? That’s really the big question.
The reality is that sluggish listings during the latter half of 2020 and first half of 2021 could easily be explained by pandemic-related fears. We can even say that listings may have been sluggish during the second half of 2021 into early 2022 for the same reason.
But at this point, it’s getting harder to blame the pandemic for a lack of home listings. Rather, what may be happening now is that homeowners don’t want to sell because they’ll spend more to upsize or purchase comparable homes given property prices and higher mortgage rates. And so we could, unfortunately, be stuck in a cycle where homes don’t get listed and prices therefore remain high.
Could a recession actually help buyers?
Some financial experts are sounding recession warnings as the Federal Reserve hikes interest rates to combat raging inflation. A recession could, to some degree, help cool off the housing market, because people may be inclined to spend more conservatively when economic conditions sour. That could help bridge the gap between the available supply of homes and the number of people who want to purchase them.
Also, a recession could result in rampant job loss, and from there, some sellers might have to put their homes on the market if they’re unable to keep up with their housing payments. Clearly, that’s not a scenario anyone should wish for. But if it does come to be, it could be just the thing that breaks the cycle of sky-high home prices and opens the door for new buyers to finally have a shot at a place of their own.
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