Rising Rates and Soaring Prices: Is the US Housing Market Headed for a Crash?

The US housing market is facing challenges as mortgage rates and property prices rise. Despite a decline in sales, the median sales price continues to increase. Learn more about the current state of the housing market.

The US housing market has witnessed a decline in sales of previously owned homes for the past three months, extending until August. This downward trend can primarily be attributed to the combined effect of rising mortgage rates, soaring property prices, and a limited supply of available homes. The National Association of Realtors reports a 0.7% drop in sales from July, with seasonally adjusted annual rates falling to 4.04 million. Surprisingly, this figure is lower than the 4.10 million predicted by economists. Compared to the same period last year, sales have plummeted by 15.3%. Despite the decline in sales, the national median sales price continues to rise. The median price has increased by 3.9% since last August, reaching $407,100. Remarkably, this marks the third consecutive month where the median price has surpassed the $400,000 mark.

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The housing market remains highly competitive due to limited inventory, resulting in bidding wars, particularly for more affordable housing options. According to the NAR, approximately 31% of homes sold last month were purchased at prices higher than their listed value. By the end of August, only 1.1 million homes were available on the market, indicating a 0.9% decrease from July and a significant 14.1% decrease from the previous year. The persistently low inventory of homes for sale, combined with increasing mortgage rates, has put considerable pressure on potential buyers.

High mortgage rates have had a significant impact on the market. During August, transactions took place when the rate for a 30-year mortgage was just below 7%. The weekly average rate for a 30-year home loan rose to 7.23% last month, reaching its highest level in over 22 years. Since August, mortgage rates have remained above 7%. These elevated rates can substantially increase monthly costs for borrowers, limiting their purchasing power in an already unaffordable market for many. Moreover, homeowners who secured low rates two years ago are discouraged from selling their properties due to the prevailing high rates.

As the US housing market enters the second half of 2023, it is yet to witness the typical surge in activity during the spring and summer months. Limited inventory and high borrowing costs continue to dampen the market. Many prospective buyers are waiting for rates to decrease before embarking on their search for a new home. Simultaneously, homeowners with favorable mortgage rates are hesitant to re-enter the market and face higher costs. Consequently, sales have declined, leading to predictions of gradual price decreases in the latter half of the year.

However, some conflicting observations suggest that home prices could continue to rise if more buyers enter the market, intensifying competition for the limited supply of homes for sale. As buyers adapt to higher mortgage rates, bidding wars are even emerging in certain markets. Although the intensity of competition may vary across regions, the scarcity of available homes is fueling bidding wars in select areas.

Looking towards the end of the year, industry experts anticipate that mortgage rates will stabilize to around 6%. Consequently, sales are projected to slow down, thereby resulting in a slight decrease in home prices. However, these predictions may be contingent on additional rate hikes from the Federal Reserve as a measure to curb inflation. While wages have shown growth and employment rates remain strong, the housing market is still impacted by inflation.