House hunters seem to be getting used to paying more for homes even as interest rates keep creeping higher.
The median existing-home price increased in May to 396,500. That’s $1,000 more than in April, 2022 when the pandemic boosted prices and despite 10 consecutive interest rate hikes by the Federal Reserve.
In April 2022, mortgages rates for a 30-year fixed loan were generally below 5.3%. Home prices reached an all-time historic high of $413, 800 in June 2022 while mortgage rates remained well below 6%. Once mortgage rates started edging toward 6%, a seven-month slowdown from July 2022 until January 2023, ensued.
But home prices in May surpassed the April 2022 numbers despite mortgage rates hovering above 6.3%.
For a homebuyer purchasing a $350,000 home with a 30-year mortgage and 20% down, it would translate to roughly $173 more per month.
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For months experts expected housing prices to decline as interest rates increased, but buyers seem to have made their peace with the higher rates. Home prices have been moving up for four consecutive months since February.
Will home prices this year surpass the peak-pandemic pricing?
There’s a real possibility when you look at the home price trajectory of the past few months. The median existing-home price in February was $363, 600, and it has continued its upward climb since. This even though mortgage rates currently are hovering above 7%.
“Those buyers who are in the market have not been dissuaded by higher mortgage rates. They are more concerned about being able to find a home to buy and crafting a successful offer that will beat out other buyers also scrambling,” says Lisa Sturtevant. “Home price growth has moderated but, in many markets, limited supply means that prices are still rising.”
Why are houses so expensive?
A low supply of homes is keeping home prices firm or rising. One reason for the limited supply of homes has been the sub-5% mortgage interest rates that 85% of current mortgage holders are locked in to, which discourages current homeowners from selling their home and buying another at today’s elevated interest rates.
Inventory in the first quarter averaged 1,630,000 listings at any given time, down 40% from the first quarter of 2019, a year before the onset of the COVID-19 pandemic, according to the National Association of Realtors.
Total housing inventory registered at the end of May was 1.08 million units, up 3.8% from April but down 6% from one year ago (1.15 million).
Where are mortgage rates headed in 2023?
Mortgage rates are now hovering around 7%, the highest level this year, and matching the rates hit last November that stalled housing market activity, at least temporarily.
For prospective buyers −and sellers −who have been waiting on the sidelines for mortgage rates to drop, higher rates are disappointing.
“The positive June inflation report likely was not enough to curb the Federal Reserve’s plan to raise interest rates again when they meet later this month,” says Sturtevant. “At the same time, while there are signs of cooling in the labor market, the overall economy is still very durable. These signs point to mortgage rates that will be above 6.5% over the coming weeks.”
Could rates exceed 7% again? And would that be enough to finally lead to widespread home price drop?
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The U.S. added 209,000 jobs in June, the lowest monthly job change since a decline in December 2020, according to data released last week by the Bureau of Labor Statistics.
The June employment figures suggest that while the labor market is softening and economic conditions likely will cool in the second half of the year, and mortgage rates will come down, say experts.
However, there will be no return to the 3% rates we had during the pandemic.
“Homebuyers have had to accept the ‘new normal’ of rates around 6.5% or even a little higher. With affordability at near-record lows and inventory still very limited, buyers will continue to find the market challenging in the second half of 2023,” says Sturtevant. “Home shoppers will have to compromise on the features they want in a home or the neighborhood they are looking in.”
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Swapna Venugopal Ramaswamy is a housing and economy correspondent for USA TODAY. You can follow her on Twitter @SwapnaVenugopal and sign up for our Daily Money newsletter here.
