Though easing mortgage rates are bringing buyers back, don’t expect the fervor of recent years
- Buyers should expect to face intensifying competition over the next few months.
- Homeowners are largely staying put, so attractive listings will see strong interest.
- Affordability remains the biggest challenge for buyers and sellers, with both keeping a close eye on mortgage rates.
The fast-approaching spring home shopping season should feel a bit calmer than in recent years. Shoppers can expect competition for well-priced homes, but without the crowds of buyers that packed open houses like they did in 2021 and early 2022, according to a new Zillow® analysis.
“Affordability will still be a challenge for many buyers this year, but sellers who price and market their home competitively shouldn’t have a problem finding a buyer,” said Zillow senior economist Jeff Tucker. “The slight drop in mortgage costs since October should revive demand after last fall’s slump, especially in more affordable markets and neighborhoods, but we are unlikely to see competition approach the fever pitch seen in the last two years.”
Mortgage movement sets the stage
The market cooled dramatically in the second half of 2022, amid rising mortgage rates and two straight years of red-hot competition. But as mortgage costs bumped down from their peak in the fall, sales returned. Though sales still remain below where they were a year ago, they’ve rebounded significantly over the past few months.
Buyers today are typically spending roughly 31% of their household income on a mortgage — $1,595 a month — after a 20% down payment1. That’s $170 a month below the 34% of income required in October, but far above the 20%–22% they were spending in the ten years before the pandemic — the monthly cost of principal and interest was less than $900 in January 2019.
Still, even while affordability impacts the share of households looking to buy, demographics are contributing to demand through sheer numbers. Zillow’s 2022 national consumer survey found the median age of the first-time home buyer was 35 years old. The youngest members of the massive millennial generation are now entering their late 20s, the oldest are approaching their mid-40s, and the bulk will soon be hitting prime first-time home-buying milestones.
Spring outlook and what it means for buyers, sellers and prices
There are as few homes for sale to start the year as there were in 2021, which, at the time, was a new record for scarcity. But the market is far from the white-hot demand-side conditions of early 2021 and 2022, when ultralow mortgage rates triggered bidding wars over most listings.
Buyers should expect competition — especially in more affordable markets like Cincinnati and St. Louis — and at lower price points. Buyers will mostly be motivated by the life transitions that have always triggered home purchases — new jobs, marriages and births — and less by the deal of a lifetime on mortgage rates.
On the sellers’ side, well-priced, well-marketed homes will receive attractive offers during their first weekend on the market, but many listings will take longer and will need price cuts to sell. Last month, 22% of listings saw a price cut, more than any January since at least 2018.
Buyers and sellers waiting for home prices to either plunge or skyrocket will be disappointed. Instead, prices are forecast to move on a slow, boring trajectory like they have historically, and inch a little higher in spring after seasonal winter lows.
While heat in the housing market has ticked up in the past few months, there’s no guarantee it will continue along this path. The courses of inflation, unemployment and especially mortgage rates will determine what comes next.
Mortgage rates will affect both demand and supply significantly. If rates move lower, toward 6% or below, they will bring more buyers into the fold and make it more palatable for homeowners to sell, increasing supply. If rates hover in the upper 6% range or above, buyers may once again put their house hunt on hold.
“The housing turnaround since November has coincided with what are typically the weakest three months of the year — forecasting the future off that can be dicey,” Tucker said. “The economic news from earlier this winter raised hopes for a soft landing of the economy and housing market, but the risk of renewed inflation or even a recession is still significant, and either would have a serious impact on the housing market.”
1 The share of median household income needed for a new 30-year fixed-rate mortgage on a typical U.S. housing unit, measured by the Zillow Home Value Index.
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