Housing Prices Show Signs of Slowing. Will It Last?

Housing has never been so expensive.

The median sales price for a new house in August was $413,500, up from $321,400 five years ago. Average home prices are now five times higher than average incomes, an all-time record. Rents have been rising for years, and landlords across the country implemented particularly sharp increases during the pandemic. The cost of housing for homeowners and renters grew faster than overall inflation last year.

This steady, substantial rise in shelter costs has been one of the top concerns for state and local policymakers over the last decade. Officials in big cities have spent lots of energy rewriting their zoning codes in an attempt to spur more low-cost housing development, doing everything from allowing homeowners to build accessory dwelling units to banning single-family zoning altogether in some areas. State officials have followed suit, passing laws that cap rent increases, promote denser housing in single-family neighborhoods, and otherwise limit local regulations on housing.

This work has begun slowing price jumps in some places, but it remains hard to gauge exactly where the market is headed. Over the last few months, home prices have started to stabilize. Prices still aren’t dropping in most places, but they’ve begun growing more slowly. Mortgage rates, which have been holding steady at a relatively high 6.5-7.5 percent over the last few years, have recently dropped to closer to 6 percent. Rents even fell slightly in a few big cities that saw a spike in apartment construction in recent years.

A recession — which some states have already entered, according to some analyses — could result in interest rate cuts that would lower the cost of borrowing for homeowners. But analysts don’t expect housing costs to fall at anything close to the scale of their last half-decade’s increase. For one thing, construction costs are still growing, with more increases expected as the federal government imposes new tariffs, which will keep the price of newly built housing high. For another, construction is slowing down in general.

“We’re at the end of a housing construction boom that started during the pandemic,” says Daryl Fairweather, the chief economist at Redfin.

That’s true for rental properties too. Austin, a hot development market over the last decade, saw rents fall in the last two years because of a glut of new apartments becoming available. But the development boom has slowed, and once most of the new apartments are occupied, prices are likely to rise again.

Also, because homeownership is the main way families build wealth, homeowners do everything they can to avoid selling their homes for less than they bought them for.

“People get expectations rooted in their mortgage payments or in their psychology and they just don’t sell,” says Chris Herbert, managing director of the Harvard University Joint Center for Housing Studies.

Home price increases tend to come in waves, Herbert says. They rose fast during the 1970s when the baby boomer generation was coming of homebuying age. They rose in regional patches during the 1980s as various metropolitan economies grew. They rose fast before the 2008 recession partly because people had easy access to mortgages.

The recent spike in prices is due partly to a shortage of supply, Herbert says. But it’s also a function of pent-up demand. Many young people held off on buying homes in the wake of the 2008 recession. Household formation rates were at historically low levels during the 2010s. When the pandemic began, mortgage rates plummeted, and many people saw a chance to buy.

“The big thing was 3 percent mortgage rates,” Herbert says. “Combine that with the pandemic-era suspension of student loan payments. That really goosed the purchasing power of people.”

Even if mortgage rates continue to decline, most analysts don’t expect they’ll reach the depths of the early pandemic any time soon. That’s created a “lock-in effect” for many homeowners who bought with low interest rates, says Nadia Evangelou, a senior economist at the National Association of Realtors. Those owners are reluctant to move because their mortgage payments are likely to go up if they do. That dynamic means less turnover in the housing market.

Two other trends are leading to increased competition in certain markets. In the wake of the pandemic, large corporations began buying a bigger share of single-family homes, leading to a small wave of bills introduced in state legislatures aimed at limiting the practice. Meanwhile, more homes are being sold for cash, a trend which spiked during the pandemic and has continued since. In some markets, especially in Florida, cash purchases make up almost half of all sales. Those buyers tend to be older and wealthier than those looking to buy their first homes.

All those factors — high construction costs, limited supply, stubborn mortgage interest rates, investor competition — suggest prices will stay high in the near term. Herbert, of the Harvard Joint Center, says he expects prices will level out over the next few years while people’s incomes gradually rise to make homes a bit more affordable overall.

On a longer timeline, he says, there’s reason to believe shrinking demand could lead to lower housing costs. After spiking at the start of the pandemic, the rate of household formation has dropped. Harvard is anticipating historically low household formation over the next decade. That’s due partly to demographic trends, with boomers aging and young families having fewer children than in years past. If immigration drops significantly — which is a policy goal of the federal government under the Trump administration — the household formation rate could shrink even more. Those factors will change the conversation about housing affordability, Herbert says.

“Over the next three to five years we’re not going to be talking about supply shortages,” he says. “We’re going to be talking about the weakness of demand.”