Some US home prices are dropping, but it's still a rich person’s market

Affordability will continue to decline even if housing prices dip further.
Some US home prices are dropping, but it's still a rich person’s market
Photo: Lucas Jackson (Reuters)
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Aspiring homebuyers scanning the US housing market will see many promising signs: Homes are taking longer to sell, and more sellers in major metropolitan markets—15% in July—are cutting prices.

Last month, sales of new homes plummeted by nearly 13% from June, according to government data released Tuesday, more evidence that the pandemic’s voracious demand for housing has waned.

But that doesn’t necessarily mean buying a home is becoming more affordable. The new data show that the median price for a new house was $439,400 in July, compared with $402,400 in June.

Why are US homes not becoming more affordable?

The US is suffering from a housing shortage, so the budgets of the wealthy are still setting housing prices in most places, wrote Redfin chief economist Daryl Fairweather. Mortgage rates, meanwhile, are considerably higher than before the pandemic.

The home affordability index, an indicator compiled by the National Association of Realtors that measures whether a typical family qualifies for a mortgage, fell to a 33-year low in June.

It will take time for the pandemic conditions that triggered a historic run-up in house prices to unwind. In addition to supply chain issues, prices were pushed up by buyers who had no intention of living in the homes they bought. Investors who purchased homes to rent or flip them made up nearly a quarter of single-family home sales in 2021. Though they now account for a smaller share of homebuyers, they continue to play a role in setting prices.

And even as many homebuyers pull out of the market, the number of houses for sale remains tight. That means home prices are unlikely to crash like they did during the 2008 financial crisis. Robert Dietz, chief economist at the National Association of Home Builders (NAHB), expects most housing markets will likely only experience a single-digit price decline from their peak.

Where are US mortgage rates headed?

Housing experts are split about whether mortgage rates will accelerate or level off in coming weeks. Like everyone else, they are waiting for clarity from the US Federal Reserve’s meeting next month. “The wild card is the future path of monetary policy,” Dietz said. “The September Fed announcement will be key.”

But even if mortgage rates trend down, homebuyers shouldn’t expect any deals in the near future. The NAHB expects its affordability index will continue to move lower in response to higher mortgage rates, Dietz added, and level off by the end of the year.