The current state of the U.S. housing market
If you bought a home in the last two years, you likely faced bidding wars, exorbitant sales prices and limited housing stock. The mismatch in supply and demand fueled a seller’s market, with home prices appreciating at record rates and many U.S. cities blossoming into hot real estate markets.
But as of the summer 2022, the simmering homebuying landscape is showing signs of cooling down. Increased interest rates, inflation and fears of a recession may be softening demand as more homes hit the market.
The current state of the U.S. housing market
New home sales in the U.S. fell in June 2022 to their lowest level in two years, according to the U.S. Department of Commerce.1 Sales tumbled across all regions, but the western part of the country experienced the largest monthly decline, according to the National Association of Realtors (NAR).2 Only 590,000 units sold in June (using a seasonally adjusted annual rate). That figure is 8.1% below the May rate and 17.4% below the June 2021 figure of 714,000. Contract signings also plunged by double digits compared to 2021.
Why the housing market is shifting
Like every other part of the economy, the housing market is subject to the effects of forces ranging from consumer trends to policymakers’ decisions. Here’s a look at some of the major factors affecting home prices and, consequently, buying and selling decisions.
Higher mortgage rates
NAR leaders partially blame increased mortgage rates for the drop in home sales. Mortgage rates have risen dramatically since the Federal Reserve began raising interest rates to quell inflation in January 2022. Analysts expect the Fed to continue increasing rates throughout this year.3
But higher rates make homebuying more expensive and likely inaccessible for some buyers. In fact, buying a home in June 2022 was roughly 80% more expensive than the summer prior to the pandemic, according to the NAR.4 That means almost a quarter of homebuyers who bought a home in June 2019 wouldn’t have the qualifying income to purchase a median-priced house today.
Increased housing inventory
More homes are slowly hitting the market after the supply of homes for sale reached record lows in February. In June, there were 9.6% more houses for sale than there were in May.5 This means buyers have more choices and are therefore less desperate to close on homes.
According to real estate firm Redfin, deals are falling through at the highest rate since the start of the pandemic.6 Around the country, 14.9% of home purchase contracts were canceled in June. That’s the highest percentage on record since 2017, not including March and April 2020 when the housing market froze because of the pandemic.
By comparison, only 12.7% of purchase agreements fell through in May 2022. And that can only happen if people decide to purchase a home in the first place. The Mortgage Bankers Association says mortgage applications declined to their lowest level since 2000 in July.7
Housing market prices
Home prices skyrocketed during the pandemic as remote workers sought larger homes in hot real estate markets. But the average U.S. home sold for $456,800 in June, down from $511,400 in May.8,9 Here’s a look at how those pandemic-era “Zoomtowns” are faring in light of current housing market trends.
During the pandemic’s height, an influx of remote workers from major metro areas like San Francisco flooded the Idaho capital’s housing market in search of affordable homes. That caused median home prices there to surge 72% in 2021.10 Today, the housing boom appears to have shrunk.11 Mortgage rates have hit a 13-year high; 61% of sellers had to reduce their sales prices in June, and home builders who were overwhelmed with demand in 2021 now have to cut back on construction.
In Austin, analysts say the housing market is returning to pre-pandemic levels. In June, home sales declined 20.3% year over year and the number of homes for sale exploded 217.8% to 7,090 active listings.12 Austin’s Board of Realtors says buyers now have more bargaining power because there’s enough housing inventory to sustain buyers for more than two months — a benchmark the area hasn’t hit since November 2019.
Home prices remain high in the Mile High City, even though inventory has almost doubled since 2021. There were 6,057 available residential properties at the end of June 2022, compared to 3,122 a year ago.13 While the housing stock is still historically low for the month of June, analysts say these shifts indicate the market is normalizing.
Seattle home prices grew 23.4% from May 2021 to May 2022.14 However, May also represented the second consecutive month of slowed price growth. Meanwhile, existing sellers now have to debate whether to reduce home sales prices as their properties remain on the market longer.
The San Francisco Bay Area
In the pricey Bay Area market, prices fell 7% between May and June 2022, with the median cost for a single-family house hitting $1.4 million from upwards of $1.5 million in May.15 Experts say it appears the housing market has peaked after reaching all-time highs in early 2022. However, homes in the Bay Area are still selling for 5% more than they did in 2021.
Like the other hot markets, more homes are being listed in Phoenix as home prices rise.16 The average home is selling for $289 per square foot there, a 26.5% increase over this time in 2021. Experts say this many available homes haven’t been seen in the Valley since prior to the Great Recession.
What to expect from the housing market ahead
It’s safe to say it’s still a seller’s market for U.S. housing, but it’s returning to pre-pandemic levels of stability. Analysts don’t anticipate a steep decline in the market because Millennials have entered their peak homebuying years, so housing demand is expected to persist.
The NAR expects home sales to drop by 13% in 2022 but rise again by early 2023. At that point, the real estate industry expects mortgage rates to have stabilized near 6%, with a steadily improving job market.17