Photo credit: anek.soowannaphoom / Shutterstock
After nearly two years of unprecedented competition, the residential real estate market is finally showing signs of cooling. With inventories still at low levels and demand still high, home sales and home price growth have begun to slow this spring.
One of the main reasons for the drop in demand is the increase in mortgage interest rates. At the start of the COVID-19 pandemic, the US Federal Reserve launched aggressive stimulus measures to avoid an economic downturn, which has pushed interest rates to historic lows and made buying homes more affordable. But amid concerns about high inflation, the Fed recently reversed course and began raising rates. The average 30-year fixed mortgage interest rate has risen from a low of 2.65% in January 2021 to over 5% now – and could potentially continue to rise for the rest of 2022.
Rising borrowing costs are discouraging buyers and shrinking purchasing budgets, especially for those who may not have the income, credit history or equity to qualify for the lower rates . But house prices themselves are also an important factor that leads to reduced interest in real estate.
Prices have followed a steady upward trajectory over the past decade, but the jump in prices since the start of 2020 has been particularly brutal. At the beginning of 2020, the median sale price for a home in the United States was $288,000, and by the start of 2021, that figure had increased by 14% to $329,000. At the start of 2022, the median home price had jumped another 16% to $376,000 and was already at $424,000 in April of this year. The pace of these increases has begun to push buyers out of the market, particularly first-time home buyers who have been unable to take advantage of property appreciation and whose wage growth or ability to save for a down payment may not keep pace with price growth. .