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  • Writer's pictureSteve Coker, CFP

Housing Prices: An Update

During 2022 the sale of single-family homes plummeted as mortgage rates rose above 7%. The rapid spike in interest rates, on the heels of the pandemic-induced spike in home prices, has simply priced many buyers out of the housing market. Indeed, the National Association of Realtors Housing Affordability Index, which compares the median family income to the expected mortgage payment on a median-priced home, has fallen to 40 year lows. Ominously, the last time housing affordability was even close to this level was 2006, preceding the 2008 housing collapse. Yet, despite the drop in the number of transactions, housing price levels have not yet dropped much, constrained by the low supply of homes available. Are we ripe for a collapse in the price of homes?

To understand the current housing environment, it is important to remember what has happened over the past 2 years. During the height of the covid lockdowns, the Federal Reserve, desperate to prop-up the economy, drove interest rates down to record lows. While the Fed’s intent was to stimulate the overall economy and keep American’s working, the tool that they used to stimulate the economy, interest rates, impacted some parts of the economy more than others. Sectors that were more interest rate sensitive, such as housing, soared as a result of the low rates. At the same time, Americans, who were often quarantined in their homes and working from home, chose to spend more on their homes. Many moved out of crowded cities and into suburbs to get a bigger home, free from the requirement to commute to the office every day. The combination of the low interest rates and the cultural shift to work from home, resulted in the largest 24-month increase in home prices in history. The median price of a home in America soared 45% from May 2020 to May 2022. Those Americans that owned a home at the beginning of the pandemic benefited from the surge, so that home equity reached record highs in 2022. However, those who were not yet in a home, often the younger generation just starting families, were priced out of the market.

We are now at a turning point as at least one of the factors driving home price inflation has reversed. Mortgage interest rates soared from a pandemic low of 2.83% in February of 2021 to 7.41% in October of 2022. Since most home buyers focus on the monthly mortgage payment that they can afford, the rise in interest rates dramatically lowers the purchasing power of would-be buyers. For example, a family budgeting $2,000 per month for a 30-year mortgage payment could afford a $484,000 loan at 2.83% interest. However, that same family could afford only a $288,000 loan at 7.4% interest. Many would-be home buyers walked away from the housing market in 2022, hoping that either interest rates would subside or prices would come down. The number of homes sold plummeted in the fall of 2022.

As we enter 2023, it appears that both buyers and sellers are simply waiting. Very few transactions are happening, and prices remain sticky. Home prices have dropped from peaks, but not much. It appears that homeowners, fixed on the values they saw their neighbors get at housing peaks, have been hesitant to sell. Many buyers, sensing that time is on their side, are hesitant to buy. There are relatively few homes for sale and few homes being sold.

The path forward for housing is difficult to see, but the most likely scenario is that home prices stall at this level for an extended period of time. Long-term many boomers are choosing to age-in-place and there are few compelling reasons to sell. Meanwhile, the younger generation may simply opt out of home ownership, leaving in an entire generation priced out of the market. Builders have been focusing on multi-family construction to provide lower cost options, continuing to constrain the supply of single-family homes available. Home prices are simply stuck between countervailing winds, and everyone seems to be waiting out the storm.


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