The real estate market has been highly competitive this year but is showing signs of cooling. Will real estate be able to sustain a historic rise in prices, or have we reached a peak? There are both significant downward pressures on future home prices as well as structural support for continued appreciation.
Rising rates and prices have dramatically decreased the affordability of homeownership. The monthly average on a 30-year fixed-rate mortgage soared from 3.27% at the end of 2021 to 5.8% today. This is the first time mortgage rates have been over 5% since 2010. Since last year, real estate prices have been on a historic run, as the June national median listing price for active listings skyrocketed to $450,000, up 16.9% compared to last year.
Signs are emerging that rising rates are having the intended effect of dampening demand. Currently, the cost of owning a median-priced home now requires 32% of the average earner’s wages. Purchase mortgage applications have fallen off, down 21% year-over-year in June, while inventory has jumped 19%. Inevitably some of the wind will come out of the market and should slow down price appreciation. But with a persistent supply-demand imbalance created by millennials finally entering the home buying market and years of under-building, the market may be more resilient against rising rates than many think.
Raw material costs remain high, and builders have struggled to catch up with homebuyer demand as new housing supply remains at historic lows, sitting below the 50-year historical average. Active listings have steadily climbed since the start of the year but are still nearly half of what they were pre-pandemic.
Additionally, the cost of home ownership has jumped, but average rents have also experienced double-digit growth over the past year. Whether renting or buying, those moving into a new home will face significantly higher costs.
While homeowners should not expect to see their property values increase as they have over the past year, predictions of a housing crash are probably overblown. The supply-demand imbalance that is at the heart of the rapid rise in prices will not resolve overnight.
