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Anyone who’s dabbled in the housing market during the last two years likely went through a whirlwind. The average sales price of a home—at half a million dollars in the first quarter—was the highest on record; housing supply is near historic lows; and interest rates are hitting the highest weekly increases in decades.
Then came the final piece in this perfect storm: inflation.
The U.S. consumer price index (CPI) rose to 9.1% in June—the highest annual increase since November 1981, according to the Labor Department. The Federal Reserve has been hiking its federal funds rate to try and tame rising inflation which indirectly caused mortgage rates to edge even higher.
But as the cost of goods, housing and mortgages becomes more expensive, many people are starting to back away from home purchases. In June, some 60,000 home-purchase agreements were canceled, marking the biggest housing contract dump since Covid-19 hit in the spring of 2020, according to an analysis by Redfin. With fewer people wanting to buy, sellers will likely be forced to lower prices to a more normalized level, some experts say.
“The cost of mortgage loans has almost doubled, slowing home sales dramatically. So far, we’ve seen a 20% decline in home prices with more to come,” says Ken Rosen, the Fisher Center for Real Estate & Urban Economics chairman at the Haas School of Business at UC Berkeley.
Housing Predictions: Home Price Growth Will Abate But Inflation May Not
On a national level, home prices are still climbing. However, prices are beginning to come down in certain markets. Some experts say this could indicate that the housing market headwinds are beginning to dissipate.
In 97 of the 100 largest U.S.markets, the annual home price appreciation rate fell more than a percentage point in May from the previous month, according to Black Knight, a real estate data and analytics company.
Many Americans are also forecasting home price growth to deflate soon. The median expected change in home prices for next year dropped to 4.4% in June from 5.8% a month earlier, according to the latest New York Fed consumer expectations survey. This is the lowest reading of the series since February 2021.
The consumer outlook on inflation is also dismal in the latest survey results. Looking out one year, consumers’ inflation expectations rose to 6.8%, up from 6.6% in May, while their three-year forecast for inflation fell to a more manageable 3.6%.
“Because of higher costs, I think consumers are more sensitive to the share of their budget spent on housing,” says Danielle Hale, chief economist for Realtor.com. “With housing costs being the largest category, households who can cut back here can achieve significant overall savings, but market conditions for buyers and renters are making that really hard to do.”
Where Home Prices Are Headed
Summer is traditionally one of the most active times for homebuying as parents want to find a home before school starts and schedules are much more open than when class is in session. But this summer season shows signs of cooling as fewer buyers are in the market for a house.
According to the Redfin Homebuyer Demand Index, which calculates requests for home tours and homebuying services from Redfin agents, demand was down 15% from last year during the week ending July 3.
Metro areas like Denver started the year strong with year-over-year price growth reaching 23.7% in March, according to the Case-Shiller Index, but demand is waning.
“We can say with certainty there is a drop-off in the buyer pool. We’re seeing sitting inventory increase,” says Bret Weinstein, CEO of Guide Real Estate, headquartered in Denver.
Pending home sales fell 13% year-over-year for the four weeks ending July 3, the largest decline since May 2020. But home prices are still elevated, along with interest rates, so it may take time for prices to reflect slowing demand.
“Rising mortgage rates on top of the huge price gains should keep buyers on the sidelines,” says Daniel Broxterman, an assistant professor of real estate at Florida State University’s College of Business and academic director of the FSU Real Estate Center. “If no additional new houses were built, it would take about eight months for the current new for-sale inventory to sell. That’s a big change from last summer when inventories were about three months.”
For Cash Buyers, Inflation Might Be a Good Thing
If inflation continues to drive up mortgage rates and sideline homebuyers who require a mortgage, cash buyers who aren’t affected by hefty loan costs will face less competition and more inventory. And since real estate is generally a reliable hedge against inflation, putting cash into a house is one way to spend money on an appreciating asset over time.
This also means that investors will likely continue to snap up single-family homes since many don’t depend on financing to purchase real estate. The investor share of all single-family home purchases in February 2022 was 28.1%, the highest since 2011, when CoreLogic began keeping track.
“Inflation has not deterred investor interest in housing to any significant degree,” says Susan Wachter, professor of real estate and co-director at the Penn Institute for Urban Research. “First-time homebuyers, however, are being hit hard by higher borrowing costs and required down payments, and are decreasing purchases.”
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