Recent data shows that the rate at which home prices are growing in the U.S. has slowed down. In February, U.S. home prices increased by 0.6% from the previous month, consistent with the average monthly gain of 0.6% over the past eight years prior to the Covid-19 pandemic. Daryl Fairweather, the chief economist at Redfin, noted that before the pandemic, it was common for prices to rise by about half a percent every month, resulting in an annual increase of approximately 5% to 6%. Despite the current higher mortgage rates, the market seems to be reverting back to this trend.
While home price growth has stabilized, experts emphasize that the current housing market landscape differs significantly from that of the past two to eight years. The average home remains unaffordable for many potential buyers, and although there has been a slight improvement in inventory, it is still insufficient to meet the existing demand. Fairweather highlighted that sellers are dissatisfied with the offers they are receiving, while buyers are grappling with escalating prices and increasing mortgage rates.
One of the stark contrasts between the present housing market and the period before the pandemic is the notably low number of transactions occurring. This decline in transaction volume is primarily attributed to the elevated mortgage rates, which reached nearly 8% last year and remain above 6% according to Freddie Mac data. Despite a brief surge in data in February, overall transactions are at levels akin to a recession, with a significant drop in sales. The restricted supply of homes also plays a critical role in affecting sales, with new listings experiencing a modest 5% increase over the last four weeks.
The growth in supply, although showing signs of improvement, is primarily influenced by seasonal trends. Economists note that homeowners tend to list their properties for sale during February in anticipation of moving during the forthcoming spring and summer periods. Additionally, life events such as job changes or marriages often necessitate a residential move. The mortgage rate lock-in effect, labeled as the golden handcuff effect, previously deterred homeowners with low mortgage rates from listing their homes as they were hesitant to secure new homes at substantially higher interest rates. However, this effect is gradually diminishing, leading to a slight upsurge in available supply.
Looking ahead, experts anticipate a decrease in mortgage rates and a stabilization in home prices in the coming year. New-home sales have been robust, with figures exceeding the pre-pandemic levels. The tight supply of existing homes has driven buyers towards the new-home market, where builders are able to offer attractive incentives such as mortgage rate buydowns or price reductions. Despite these positive trends, there is acknowledgment that more time will be required to address the housing supply gap on a nationwide scale, despite increased construction levels.