Home prices are soaring — so what does that mean for buyers?

Mortgage rates may finally settle down after more than a year of steady increases, but experts don’t expect much relief for homebuyers. 

Nationwide home prices rose for the first time in eight months in February as an increase in demand — spurred by slowing interest rates — ran into persistently low housing inventory. 

The sudden jump was all the more notable given price hikes in most of the nation’s largest markets.

Economists expect affordability issues to continue in the coming months even as mortgage rates settle. 

Prices suddenly rise after slowing for months 

Home prices have cooled significantly for months as the Federal Reserve’s fight with growing inflation has pushed up mortgage rates and, consequently, many prospective buyers out of the market.  

Nationwide price gains slowed again in January and were up year over year by 3.8 percent, according to the S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index. This is down from a 5.6 percent annual gain in December. 

But in February, monthly prices climbed nationally for the first time since last spring, and they rose in 39 out of the nation’s 50 largest markets. 

Seasonally adjusted prices increased by 0.16 percent last month as 30-year mortgage rates saw declines and inventory challenges continued, data from Black Knight, Inc. shows.

This marks the strongest single-month gain since last May. 

“Home sales activity in February was driven by a dip in interest rates combined with persistent low inventory. This has propped up prices in the East in what is typically the beginning of the most active buying season,” Gunnar Blix, director of housing market research at Black Knight, told The Hill. 

“If low rates and tight inventory persist, that strength may continue to drive price increases. On the other hand, if sales continue to be strong, this may spur further rate increases which could dampen demand,” he added. 

Although home prices shot up in most major markets, they fell in several cities that experienced pandemic era booms, including Austin, Texas; Las Vegas, San Francisco and Seattle. 

How mortgage rates could affect price growth 

Economists suggest the modest, months-long price slowdown could taper off further as mortgage rates moderate. 

“The NAHB economic forecast indicates that we will see moderate price weakness in the months ahead, despite meager inventory levels, due to elevated interest rates and challenging housing affordability conditions,” National Association of Home Builders chief economist Robert Dietz told The Hill.  

“The general trend of lower home prices will end as the mortgage interest rates settle in around or just below 6 percent,” he added. 

Average mortgage rates dipped for the third consecutive week as of March 30 to 6.32 percent, data from Freddie Mac shows. At the same time last year, the benchmark mortgage rate sat at 4.67 percent.  

“Tightening credit conditions, alongside higher mortgage rates and low housing stock, could also negatively impact buyers, especially those looking to purchase their first home,” Yelena Maleyev, an economist at KPMG Economics, told The Hill. 

“Tighter conditions, higher than 6 percent mortgage rates and still-high prices in many parts of the country are continuing to create a difficult environment for buyers, especially first-time buyers. Inventory in the under-$300,000 range remains tight and that is an area where we have seen a continuation of bidding wars,” Maleyev said. 

“Homeowners who are looking to move up in the market are also having a difficult time finding the right home, and some have even resorted to building a new home in the lot of their existing home instead,” she added. 

Low inventory will be a long-term challenge for the industry and buyers 

Black Knight data revealed that housing inventory fell for the fifth-consecutive month, reaching its lowest point since May 2022. And 90 percent of markets experienced deteriorating inventory levels last month.  

“New listings — already trending well below pre-pandemic levels for months — ran 27% below those levels in February as potential home sellers continued to shy away from the market,” Black Knight Vice President of Enterprise Research Andy Walden said in a statement. 

Persistently low inventory fueled partly by a dearth of new listings is one of the primary challenges the market faces in the future. Estimates suggest the U.S. housing stock is short by at least one million homes. 

“The long-run challenge remains inventory,” NAHB’s Dietz said. 

“And given the lack of building over the last decade, leading to a housing deficit measured in the millions, and a growing number of homeowners who are not putting their homes onto the market due to mortgage rate lock-in effects — why sell when you can rent — the resale market will not gain much relief,” Dietz said.