In roughly two years during the pandemic housing boom, home prices rose more than 40%. Since then, home prices continued their upward ascent. Capital Economics, for its part, recently said that the national average house price has risen almost 50% since the start of the pandemic. First American yesterday released its home price index report that found “house prices nationally are now 52% higher compared to pre-pandemic levels,” having increased more than 6% in the past year.
But maybe things are set to change. Zillow recently revised its home price forecast upward, but it only sees home values rising 1.9% this year; previously, it expected home prices to increase by 0.9%. Zillow called it “slower than long-term norms but a welcome slowdown for first-time buyers compared to the rapid appreciation seen over the pandemic,” in a report published earlier this week. Still, before the pandemic, it was normal for home prices to appreciate around either 5% or 6% each year, Redfin’s chief economist, Daryl Fairweather, recently noted.
It’s not the first time Zillow’s changed its home price forecast for the year, and probably won’t be the last. But its reasoning has to do with new for-sale listings and mortgage rates.
“With interest rates still elevated, the modest upward revision is mostly the result of a slowdown in the growth of new for-sale listings,” Zillow said. “After rising at an annual pace of 21% in February, the year-over-year increase in new listings eased in March to just 4%, indicating that the market remains quite tight for would-be homebuyers.”
Yesterday afternoon, Federal Reserve Chair Jerome Powell basically said interest rate cuts might not happen this year. “Right now, given the strength of the labor market and progress on inflation so far, it’s appropriate to allow restrictive policy further time to work,” he said, later adding that depending on inflation, the Fed will maintain the current interest rate levels for as long as needed.
That’s not good news for mortgage rates, or really anyone who wants to buy a home. In October last year, mortgage rates reached a more than two-decade high at 8.03%. For some time, they were falling, at one point dipping to 6.61%. But in the past week or so, mortgage rates have been on the rise; the latest reading showed the average 30-year fixed mortgage rate is 7.50%, the highest all year.
“Persistent inflation has diminished any optimism that the Federal Reserve may start to cut rates in June, meaning mortgage rates seem more and more likely to remain ‘higher for longer’ this year,” First American’s chief economist, Mark Fleming, said in an analysis accompanying its home price index.
No one knows what will happen with mortgage rates or new listings, but we know the lock-in effect is real: So as long as mortgage rates are higher than what people are used to, homeowners will choose not to sell. “Many sellers will remain on strike keeping a lid on supply,” Fleming said.
For its part, Zillow said, “It remains to be seen how new listings will fare in April—the Easter holiday falling in March and the fact that February was a leap year are likely clouding the broader picture.” Nevertheless, last year, existing home sales fell to their lowest point in almost 30 years; and Zillow seems to expect them to fall further this year.
“Zillow’s forecast now calls for 4.06 million existing home sales in 2024, slightly below both 2023’s level of 4.09 million and the previous forecast of 4.1 million existing home sales this year,” it said, despite February’s “better than expected sales.”
