The housing market has made a remarkable recovery from the start of the COVID-19 pandemic. Prices have surged nationally year over year most months by 20%, according to the carefully followed S&P Case Shiller price index. The rise was fired by low interest rates and the mobility of Americans helped by the “work from home” economy. Those days may be over, as the housing market moves onto shaky ground.
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Mortgage rates through most of 2021 and early 2022 dropped to below 3% for a 30-year fixed mortgage. This made housing more affordable. And demand in many cities was triggered by the fact that, as offices closed due to the spread of COVID-19, people moved from where they had to live to where they wanted to live. Many of these people moved away from such very expensive coastal cities as New York, San Francisco and San Jose. San Jose’s median home prices rose above $1 million early this year, which was the highest in the country.

Home demand has begun to be undermined, primarily because home mortgage rates have jumped above 6% for the first time in years. Homes that were affordable are now well beyond the financial budgets of many of America’s potential home buyers.

Not every city will have a decline in home prices, but the rate at which the prices grow could become much more muted. Realtor.com recently released its The Housing Market Is About to Get Hammered: What Homebuyers, Sellers Should Know report.

Until recently, some homes for sale in attractive markets had several bidders and people often paid above the asking prices. Those days are all but gone.

The authors of the Reator.com study pointed out that mortgage rates will continue to rise because of Federal Reserve decisions. Rates at 5.89% at the start of September may: “Just this increase coupled with higher prices makes the median monthly mortgage payment nearly two-thirds, 63%, more expensive than the same time a year ago and more than three-quarters, 78%, more expensive more than two years ago.”

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The markets most likely to correct are those that had skyrocketing home prices over the past year. This may include Boise, Miami and Tampa.

What could undermine the rise in interest rates? High unemployment driven by a drum in interest rates. This could bring down mortgage rates but drop the number of potential buyers.

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