Despite Higher Mortgage Rates, US Home Sales Rise 4.2% With Median Prices Nearing $400K.

As mortgage rates continue to rise, more homebuyers are entering the market and this is putting pressure on prices – which could have a long-term impact on future homebuyers.

Between January and February of this year, existing home sales rose 4.2% to a seasonally adjusted annual rate of 4.26 million units, according to the National Association of Realtors. Meanwhile, home prices have also been steadily climbing — the median price of existing homes reached $398,400 in February, up 3.8% from a year earlier ($383,800).

“Homebuyers are slowly entering the market,” said NAR Chief Economist Lawrence Yun. “Mortgage rates haven’t changed much, but more inventory and options are releasing pent-up demand for housing.”

As recent market trends indicate, rising housing prices and mortgage interest rates are increasing financial pressure on homebuyers and are likely to continue to do so for the foreseeable future.

Why do house prices continue to climb?

The rise in home prices is likely the result of a flexible labor market, persistently low housing inventory, and strong buyer demand. Even with mortgage rates hovering in the 6-7% range — which is significantly higher than pre-pandemic levels — buyers remain deterred by fears of even higher prices and lower housing inventory in the future

A report from the U.S. Bureau of Labor Statistics says total nonfarm payrolls rose by 151,000 jobs in February, while the unemployment rate remained relatively low at 4.1%. Most economic experts generally consider an unemployment rate between 4% and 5% to be healthy.

As of the end of February, the U.S. inventory of unsold homes stood at 1.24 million units, up more than 5% from January, NAR reports. At the current monthly sales rate, 1.24 million units would be equivalent to 3.5 months of supply, well below the six-month supply traditionally considered a balanced market between sellers and buyers.

This tight market is putting upward pressure on home prices, as buyers adjust their expectations, opting for smaller properties or stretching their finances further to secure homes before prices climb further.

“We are still in a relatively tight market situation,” Yun shared with CNBC.

Interestingly, first-time home buyers are entering the market in greater numbers, accounting for 31% of all sales in February, up from 26% a year earlier. However, investor purchases have slowed significantly, falling to just 16% of transactions, down from 21% last year.

This shift suggests that more homeowners or second home buyers are competing directly in the market, often with cash purchases, while maintaining price stability despite higher credit costs.

How could this affect your next real estate purchase?

To navigate this challenging real estate market, buyers may need to adjust their approach, perhaps changing expectations about home features or considering properties in less competitive markets.

Exploring alternative financing options can provide some relief, but they often have some drawbacks. Products like adjustable-rate mortgages, interest-only loans, and balloon mortgages can be beneficial in the short term, but they can lead to significant financial challenges if buyers don’t fully understand the terms and long-term implications.

Buyers may also find it beneficial to buy a home now and consider refinancing later if/when mortgage rates drop. Refinancing can lower monthly payments, reduce the total interest paid, or shorten the term of the loan. However, buyers should carefully evaluate the costs of refinancing, including fees and closing costs, to ensure that this approach is appropriate based on their financial situation.

Finally, timing may also play a crucial role. Buyers who can be flexible and wait for traditionally quieter buying periods, such as the fall or winter seasons, may benefit from reduced competition and increased bargaining power.

For current homeowners, rising home prices can offer advantages

“Every percentage point increase in home prices translates into about $350 billion in increased housing equity for American homeowners,” Yoon shared with NAR.

Homeowners who sell in the current market may find themselves with increased equity, providing additional cash to leverage toward their next purchase or investment.