As everyone already knows, rising interest rates and tight supply have been the most important factors shaping the real estate market since 2022.
The Federal Reserve began raising key interest rates in March 2022 in response to soaring inflation. Following sharp increases in the cost of materials and products in several industries during the pandemic era, inflation in the immediate aftermath soared to its highest levels in 40 years. To address these high inflation rates, the Federal Reserve raised rates 11 times between March 2022 and July 2023, from nearly zero to 5.5%.
These interest rate increases ended the era of historically low levels. mortgage Interest rates. Typical rates ranged from 3.4% for a 15-year fixed mortgage to 4.2% for a 30-year fixed mortgage in February 2022. In October 2023, rates hit 8%, the highest since 1971. Mortgage rates began to decline at the end of 2023 after several months in which the Federal Reserve decided to maintain key rates and not raise them further.
Rising interest rates, combined with severely depleted inventory and high home prices, created an inhospitable environment for buyers. The result: In December 2023, home sales activity fell to its lowest level in 28 years, according to Data recently released by the National Association of Realtors (NAR).
What market conditions have meant for home prices in different regions
From an investor’s perspective, this level of pressure on the housing market translates into a concern that the market will eventually collapse and home values will fall off a cliff. This has not happened and house prices have continued to rise in many parts of the country, seemingly against all odds.
However, there is a specific reason why home prices continue to grow despite rising interest rates: pent-up demand dating back to the beginning of the pandemic that cannot be met with the current limited inventory. Therefore, the housing market as a whole was still defined by growth in 2023. In December 2023, the median home price in the US was $382,600, up 4.4% from $366,500. December 2022.
National averages like these often obscure the regional realities of the real estate market. It is always more accurate (and more useful for investors) to talk about real estate markets. We pulled data and averaged the median sales price of the top 100 US markets between 2022 and 2023 and compared them to find year-over-year growth rates. The results show strong regional disparities consistent with post-pandemic regional market trends.
Affordability was the biggest factor in buyers’ decisions since at least mid-2022, when mortgage rates began to rise. Of course, it was a huge factor before that, too, and fueled pandemic-era migration patterns, including the now-infamous Sun Belt boom that saw cities like Austin, Texas, and Phoenix experience unprecedented surges in demand.
In particular, Austin and Phoenix saw substantial declines in home price growth in 2023, according to our data set. Austin’s home price growth rate declined the most, down 11.31%, while Phoenix’s home price growth rate declined by 4.62%.
Changing circumstances and buyer behavior are behind these figures. During the pandemic, buyers’ search for affordable places to live, at least in some cases, came from the increased mobility that came with remote work. People felt like they suddenly had more options about where to live and work. Phoenix and Austin were such attractive destinations because they are desirable cities in warm climates that, at least before 2021, were affordable.
What drives buyers now is a much more acute need to be able to afford a home. In many cases, people are now moving out of areas they can no longer afford, rather than moving to areas that will offer them a better overall deal. The relative decline of Sun Belt destinations makes a lot of sense in the context of this narrative, as does the steady rise of affordable and semi-affordable metropolitan areas in the Midwest, Northeast, and South.
For many people, it is now a very clear question to move somewhere they can afford and where they can get a decent job. Places like Syracuse, New York; Hartford, Connecticut; Knoxville, Tennessee; and Miami offers people just that. All four recorded positive home price growth rates of over 8%, with Syracuse emerging as the leader at 9.11%. New York had the most destinations, with a positive home price growth rate, and Syracuse, Rochester and Buffalo made the top 10.
The state that suffered the biggest drop in home price growth? California, with three metropolitan areas among the top 10 cities experiencing declines in the rate of home price growth:
- Stockton: -3.8%
- Sacrament: -4.26%
- San Francisco: -6.25%
By now it’s clear that some parts of California are increasingly unaffordable for the average buyer due to a combination of sky-high home prices, high local unemployment rates, and an overall high cost of living. Recent increases in mortgage rates acted as turning points for these markets. They were already in trouble after the unsustainable growth of the pandemic era; Now they are experiencing the consequences.
What the market could do in the future
Much depends on when (and if) the Federal Reserve decides to start cutting rates. But that’s only half of the equation. The other half is the long-standing problem of limited inventory. Even if mortgages become more affordable, if inventory remains at its current levels, home prices will most likely continue to behave as they are now, with rapid growth in currently affordable areas where there is very high demand and slow growth in areas that have already peaked as Affordable Destinations.
NAR Chief Economist Lawrence Yun is optimistic, commenting in the press release: ”Sales in the past month appear to have bottomed out before inevitably rising in the new year. “Mortgage rates are significantly lower compared to just two months ago, and more inventory is expected to appear on the market in the coming months.”
We believe it will be some time before current housing market patterns change significantly. Even with mortgage rates falling slightly in recent months, inventory is unlikely to increase substantially.
It is important to remember that many of the sellers who do not list their homes for sale are also potential buyers who are unwilling or unable to deal with the new reality of high mortgage rates. Today’s first-time buyers are likely to continue their diligent search for homes in affordable areas and are willing to pay a premium to make the dream of homeownership a reality.
Investors take note: Be aware of what “affordable” means for your region and where it is – that’s where all the real estate action will be happening this year.
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BiggerPockets Note: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.