The past year has been marked by rising home prices and tight supply, although some indications are that the trend could be beginning to slow down but not quite abate.
Throughout the pandemic, demand for housing towered over the supply of new and existing homes and caused prices to mushroom as the seller’s market only intensified. However, while the market is still smoldering hot, there are some indications and predictions that the pace may begin waning in the coming months.
In June, the median sale price of an existing home hit a record high of $363,300, according to the National Association of Realtors. That marks a whopping 23.4% increase from June 2020, when the median sale price hovered at $294,000. But will prices keep inflating? The NAR’s housing and commercial research director, Gay Cororaton, said yes, but at a slower pace.
Several factors are driving the surges, but supply and demand lead the list, according to Cororaton.
Inventory was already tight before the pandemic began, a trend that started in 2012, according to Cororaton. She said that one constraint was labor supply, affecting the housing market even before COVID-19 began wreaking havoc on the economy. Various zoning regulations were also not conducive to increasing supply, she added.
“Even before the pandemic hit, supply was already tight. Then the pandemic comes around, people don’t want to list their homes, and then the supply-chain issues affecting lumber and … appliances,” Cororaton said. “All of those just came together, causing this more critical supply issue.”
Cororaton said that there has recently been some easing in demand for homes and a bit of an uptick in supply. She said that the U.S. had just about 1.9 months’ worth of supply for existing home sales at the beginning of the year. At the end of June, the inventory of homes for sale was 1.25 million, a 2.6-month supply at the current sales pace. The month prior, there was a 2.5-month supply.
“It’s still being driven by low mortgage rates,” she said, pointing out that they did tick up slightly but are essentially flat. She said those low mortgage rates are fueling the demand but said that inventory is still tight.
Cororaton noted that while housing prices are up some 23% year over year, wage growth has not kept pace with those breakneck increases, meaning that it could potentially be more difficult for people to purchase homes now than a year ago.
Cororaton predicted that the U.S. will begin experiencing slower demand but said that she thinks inventory will remain tight, which means prices won’t start falling in level terms as the country approaches next year.
She said that because of that supply tightness, her group is not forecasting the level of prices will go down but rather thinks that there will be a slowing in the pace of growth.
“The pace of appreciation is going to slow to less than 5%. We won’t see double-digit price inflation,” she said, “but we won’t see this broad-based decline in prices.”
Patrick Gourley, an assistant professor of economics at the University of New Haven, told the Washington Examiner that in the spring of 2020, there began to be a deluge of people wanting to move out from urban areas and have suburban single-family homes in light of the COVID-19 pandemic.
“That paired with the lack of people wanting to sell their homes really kind of seized up the housing market,” he said, noting that some parts of the country saw even more profound spikes in housing costs than others.
Gourley said that for the health of the U.S. economy, he hopes that the country is starting to see the housing market begin to cool off, but he said that in the near future, at best, he thinks there is a chance it could be plateauing.
“It’s not so much it’s cooling, as it’s just staying the same,” he said of the market. “I don’t know if there is much evidence that we’ve seen a peak yet.”
He said that if prices plateau, it’s a neutral conundrum because it means that the housing market isn’t getting worse, but it also isn’t getting any better for those who want to go out and purchase a home.
But should people go out and try to buy a house now? Gourley said that many people, especially those younger and who might not have the means to purchase a home, now have decided to wait and see what the future holds.
Apart from supply and demand, Cororaton did say there might be some slight cooling in the fall compared to the summer, which she attributed to seasonal factors that happen each year and not necessarily concrete changes.
Another factor in the housing market equation is inflation, which has become a noticeable side effect of U.S. economic recovery. Inflationary pressures have consistently outpaced expectations from the Federal Reserve and other economic forecasters, including those in the Biden administration.
According to the most recent report from the Department of Labor, consumer prices increased 5.4% in the year ending in July. The figure was slightly higher than expectations but was less dramatic than the lurching price increases seen over the previous few months.
The Federal Reserve has not veered from its pandemic-era monetary policies to slow inflation but has rather decided to keep interest rates near zero. The central bank has said it won’t hike rates until inflation runs at 2% and there is full employment. The Fed has acknowledged that inflation has been higher than expected but claims that it is transitory and that prices will fall.
Cororaton highlighted the two indicators that the Fed examines regarding interest rate changes, inflation and unemployment, and said that she thinks, given the economy’s trajectory, the central bank might start raising rates a bit as soon as the middle of next year.
“So, I think in terms of whether you want to wait for prices to fall — they’re not going to fall — and you will only see interest rates ticking up. So, if you have the down payment now, lock in that low mortgage rate now,” she said.
All in all, the housing market is largely in wait-and-see mode. Although the pace of housing-price increases might end up slowing, it isn’t easy to project out exactly what may happen.
“There’s obviously a crystal ball aspect to this. Who knows what’s going to happen in the coming weeks, let alone months or years?” Gourley said.
