Home Prices Hit Record High As Housing Supply Shortage Worsens

Residential homes are shown under construction in Valley Center, Calif., on June 3, 2021. Mike Blake/Reuters

Home prices hit a record high again in May, amid a worsening supply shortage in the housing market.

The sharp jump in mortgage interest rates in last year caused an overheated housing market to slow down, but the slump did not last long.

The cost for a home, which has been rising since the start of the year, rose 0.7 percent nationwide at a seasonally adjusted rate, according to the Black Knight Home Price Index.

Housing prices rose 0.1 percent compared to May 2022 and are expected to continue rising every month.

The price surge reflects a worsening housing inventory shortage that has squeezed out would be homebuyers.

“Though the backward-looking annual growth rate dipped to 0.1%, May’s exceptionally strong +0.7% month-over-month gain would equate to an annualized growth rate of 8.9%, suggesting the annual home price growth rate would remain at or near 0% for only a short time before inflecting and trending sharply higher in coming months,” said Andy Walden, Black Knight’s vice president of enterprise research, in a statement.

Higher Mortgage Rates Make Homeowners Reluctant to Sell

The Federal Reserve’s aggressive interest rate hike policy caused mortgage rates to rise above 7 percent for the first time in nearly two decades, leading to a slow down in the overheated housing market.

“The same lever used to reduce demand—that is, raising rates—has not only made housing unaffordable almost universally across major markets, it has also resulted in significant supply shortages by discouraging potential sellers unwilling to list in such an environment, further strengthening prices,” Mr. Walden said.

“At this point, even if rates come down, but not so sharply as to entice potential sellers out of their sub-3.5% mortgages, it could risk a widespread reheating of home prices across the U.S.,” he added.

Prices began dropping last summer, after the 30-year fixed-rate mortgage rate more than doubled in six months and continued to fall until January, when demand rose again amid very tight supply.

Buyers are now being forced to adjust to higher rates after years of historically low mortgage rates.

A home stands for sale in a Brooklyn neighborhood with a limited supply of single family homes in New York on March 31, 2021. Spencer Platt/Getty Images

“Mortgage rates have hovered in the 6 to 7 percent range for over six months and, despite affordability headwinds, homebuyers have adjusted and driven new home sales to its highest level in more than a year,” Freddie Mac Chief Economist Sam Khater said recently.

Rates on the popular 30-year fixed mortgage are currently hovering around 6.81 percent, according to Freddie Mac, higher than the 5.3 percent rate recorded in May 2022 and almost twice the pre-COVID-19 pandemic average of 3.9 percent.

Despite the nearly doubling of home prices from before the pandemic, costs have barely dropped, owing to the single family housing shortage.

New listings have plunged about 25 percent from a year ago, as potential sellers who locked in pre-pandemic mortgage rates before 2020 become reluctant to sell, exasperating the lack of inventory.

Homeowners with low mortgage rates are reluctant to pay a much higher interest rate on another home if they sell.

Lack of Salable Homes Pushes Up Prices

The median price of a pre-owned home in May was $396,100, according to the National Association of Realtors.

“There is no doubt that the housing market has reignited from a home price perspective,” added Mr. Walden.

“Firming prices have now fully erased the pullback we tracked through the last half of 2022.”

Although sales of pre-owned homes are still far below 2022 levels, this has less to do with higher costs and more to do with low inventory.

The total number of available homes on the market in June dropped 47 percent from the average before the pandemic, which caused a massive housing boom, according to Realtor.com.

Across the country, housing stock levels have fallen in 95 percent of the major U.S. home markets, mainly in Western cities like Phoenix, Boise, Ogden, Colorado Springs, and San Francisco, according to Black Knight.

More than half of the nation’s 50 largest housing markets in May, mainly in the Midwest and Northeast, returned to their prior home price peaks, or set new highs.

However, home prices are still weaker in the West and in many of those metropolitan areas which had an influx of remote workers looking for homes during the early months of the pandemic in 2020.

Now, prices out West are starting to heat up again as inventory begins to slacken.

Homes in San Jose, which lost 10 percent of their value last year, saw a 1.4 percent price surge in May, while San Diego, Los Angeles, San Francisco, and Seattle also saw price growth that month.

On the other hand, in Austin, one of the major pandemic boom towns, home prices continue to drop.

“Inventory there continues to run above pre-pandemic levels, putting downward pressure on prices, which have fallen to -13.8% below peak, the largest gap of any market. Just eight of the top 50 markets are currently more than 5% below their 2022 peaks,” noted Mr. Walden.