Have house prices and mortgage rates peaked? A hopeful look ahead

America's home prices are still rising, now hovering around a median of $430,000 in April. But it finally looks like those high housing costs are likely to come down, perhaps as soon as this month.

This is according to a new report by Realtor.com®, which found that April listing prices increased by only 2.5% compared to a year earlier. This is the slowest annual growth seen since April 2020, when COVID-19 shutdowns forced the real estate market to a halt.

After the markets reopened, the pandemic unleashed a steep and unprecedented rise in home prices, peaking at $449,000 last June. But the latest figures suggest that this rampant seller's market may have finally peaked and will soon be gone.

"At this rate of slowdown, listing prices are expected to decline relative to the previous year sometime in May," predicts Realtor.com Chief Economist Danielle Hale in her latest analysis of housing trends. "For buyers, a slowdown and potential drop in listing prices can be a welcome relief."

Why housing prices and mortgage rates may have peaked

And here's more good news for May: As long as inflation continues to lose steam, mortgage rates may soon drop as well.

"With a slowdown in the rate of inflation, interest rates should decline gently during 2023," Sam Khater, Freddie Mac's chief economist, recently predicted.

This double dose of hope may be just what homebuyers need to hear right now to get to some open houses and get moving.

"We may see an improvement in affordability compared to last year in the coming months," Hale continues. However, "it is important to note that availability is expected to continue to create a headwind for many apartment buyers this year."

Indeed, the monthly cost of financing 80% of a typical house is 19% higher than a year ago, which amounts to an additional $340 per month.

Until those costs come down, the housing market is likely to remain largely locked in stark competition, with homebuyers waiting for prices to drop and sellers waiting for more buyers to drop in.

"Some buyers and sellers may want to wait," says Lawrence Yun, chief economist for the National Association of Realtors®.

However, waiting carries some risks.

"You can raise house prices when rates are lower, instead of buyers being able to negotiate a better price now and then refinance if rates were to drop," explains Yoon. "With such short inventory, it is unclear whether the right home for the market price will appear now later."

Why lowering house prices and mortgage rates won't be enough

Although homes may soon cost a little less, homebuyers may face other issues. First, there simply aren't enough houses for sale.

Although this April saw 48.3% more listings than a year earlier, inventory is "still below pre-pandemic levels," Hale notes. "That means there were still fewer homes available for purchase on a typical day in April than a few years ago."

In addition, April's inventory growth rate slowed for the second month in a row, with 21.3% fewer new properties added to the overall mix that month.

Many sellers have stopped listing because they feel "locked in" by their current low mortgage rates.

Additionally, the prospect of a sale may seem less enticing, now that the hot seller's market of the past two years is on a downward trend.

In April, 12.2% of listed homes received a price reduction. That's below the 2017-19 average, Hale notes, suggesting that "sellers may be setting their initial asking price to be more in line with buyers' expectations than was typical before the pandemic."

Homes are also lingering on the market, a median of 49 days in April. That's 17 days more than last year, though still shorter than before the pandemic.

However, the future looks bright for many sellers, especially if they have owned their home for a while.

"Sellers who have built up home equity are in a better position to find their next home in a cooling market," Hale says. But they "may have to moderate their expectations for the sale of their current home."

Where affordable housing markets are hiding

Meanwhile, homebuyers are scouring far and wide for affordable homes.

Many are targeting less expensive metros in the middle of the country, although this, in turn, has caused prices to start rising in those areas. Prices rose the most compared to a year ago in Memphis, Tennessee (31.7%), Milwaukee (21.7%) and Kansas City, Missouri (21.1%).

On the flip side, areas that attracted the most newcomers during the pandemic - and where prices boomed - are now reversing many of these patterns. The biggest price declines were seen in Austin, Texas, where prices fell 8.8% year over year; Las Vegas, where they fell by 7.1%; and Houston, down 4.6%.

Yun believes that many of the long-distance moves created by the start of telecommuting in 2020 may end, but work arrangements will still play a role in determining where people live.

"Long-distance regional moves will be limited - for example, across the very lucrative market of Cincinnati from San Francisco," he says. “But going to the next district and the outer suburbs will be popular. Houses are cheaper in the outer rings, and those who have the opportunity to work occasionally from home will not have to travel every day."