After record-breaking speed and price growth in 2021 and 2022, the housing market has largely settled and avoided a crash in prices, but challenges remain, according to Zillow.
Home values are growing in line with pre-pandemic norms, a path that Zillow forecasts will continue. Buyers are finding a costly and competitive market, but one slightly calmer and easier to plan and budget for.
Sellers continue to sit on the sidelines, holding on to low mortgage rates. And while rates could tick down over time, Zillow said the issue of affordability, which has grown worse over the past few years, is unlikely to significantly improve.
“The housing market is stabilizing after the turbulence of the pandemic, but the effects will be with us for a long time,” Zillow senior economist Jeff Tucker said in a release. “Price appreciation is back to normal after a short reset, but that means buyers still face serious cost challenges and competition, especially for the most affordable houses and in less expensive markets.”
Record-setting home value growth during the pandemic was largely supported by market fundamentals. Homebuying demand spiked because many households had not yet been able to strike out on their own after years of underbuilding during the Great Recession, and the huge millennial generation had entered prime homebuying age. Ultra-low mortgage rates, combined with the pandemic-spurred boom in remote work, added fuel to the fire.
Demand cooled as mortgage rates doubled over the course of 2022 to the upper 6 percent range, which is roughly where they stand today. Listings typically went pending in 10 days during this year’s spring shopping season — slower than the mere six days during the height of the pandemic, but much faster than the 19 days in 2019, according to Zillow.
While Zillow’s economists were confident that fundamentals would keep prices resilient, the sheer force of the pandemic housing boom caused others to project an equally painful comedown to follow. Those projections have not come to pass. At the start of this year, Zillow’s forecast for 2023 home values called for a 0.7 percent decline. Now, Zillow expects 5.5 percent growth in 2023 — roughly in line with a normal year before records were shattered during the pandemic.
Home values fell in the second half of last year, but the same low mortgage rates that supercharged pandemic demand for purchases and refinances also put a floor under how far home values could fall. Existing homeowners have largely chosen to stay put rather than purchase another home with a much higher mortgage rate, which would cost hundreds of dollars more each month.
The resulting decline in supply has been more significant than the pullback in demand. Mortgage rates could tick down in the long term if inflation continues to recede, but they almost certainly won’t return to the historic lows seen during the pandemic.
For those still working to save up for a home, the record-breaking rise in prices and subsequent surge in mortgage rates effectively doubled the cost of a mortgage. At 20 percent down, monthly payments rose from about $875 in 2019 to just over $1,800 now, Zillow data shows.
Competition for the few homes listed is high, and home values have once again been growing at a roughly normal pace historically. Cost pressures and a lack of choices for buyers have dragged down sales. Zillow forecasts 4.2 million existing home sales in 2023, which would be the lowest level since 2010.
Recognizing the opportunity, homebuilders have accelerated activity in recent months after a sluggish end to 2022 and an equally sluggish beginning to 2023.
Builders are changing tactics to confront cost pressures that high interest rates have laid on both them and their customers, with detached single-family homes giving way to more economical options. Builders are also more likely than homeowners to offer attractive financial incentives to buyers, including mortgage rate buydowns. Availability and flexibility are paying off: sales of new builds are up 24 percent year-over-year, Zillow added.