BAM Key Details:

  • A new Zillow analysis shows buyers can expect competition for well-priced homes, especially those at a lower price point, but without the crowds of 2021 and early 2022.
  • According to a new Redfin report, while buyer demand has cooled due to rising mortgage rates, buyers are still more active than they were last fall, and pending home sales continue to improve. 

This year’s spring home shopping season could be calmer than the past few. 

According to a new Redfin report, buyer demand is down, thanks to rising mortgage rates. But that hasn’t stopped buyers, who are more active than they were last fall.

And a new Zillow analysis shows this year’s home buyers can expect competition for well-priced homes, especially at lower price points, but with less intensity than we saw in 2021 and early 2022. 

Affordability will still be a challenge for many buyers this year, but sellers who price and market their home competitively shouldn’t have a problem finding a buyer. The slight drop in mortgage costs since October should revive demand after last fall’s slump, especially in more affordable markets and neighborhoods, but we are unlikely to see competition approach the fever pitch seen in the last two years.

Jeff Tucker

Zillow Senior Economist

Buyers can still expect competition for well-priced homes in desirable areas

Redfin’s Homebuyer Demand Index dipped 1% from a week ago—the first drop after a month of upticks. Mortgage purchase applications also dropped 6%. 

Those numbers represent the market’s reaction after recent disappointing news on inflation caused mortgage rates to climb. Some buyers are backing away from the market as rates again climb toward 7%. 

The housing turnaround since November has coincided with what are typically the weakest three months of the year—forecasting the future of that can be dicey. The economic news from earlier this winter raised hopes for a soft landing of the economy and housing market, but the risk of renewed inflation or even a recession is still significant, and either would have a serious impact on the housing market.

Jeff Tucker

Zillow Senior Economist

That said, buyer demand is still stronger than it was during its November trough. While buyers have been approaching the market more tentatively, the Redfin Demand Index is up 17% from last fall’s low point, when mortgage rates peaked at over 7%. 

Pending home sales are also improving. While down 18% year-over-year, sales have rebounded significantly over the past few months. Buyer demand for well-priced, move-in-ready homes in desirable neighborhoods is strong enough to drive competition. 

That 18% drop in pending sales, by the way, is roughly half the 33% drop from last November.

Higher mortgage rates drive up competition for lower-priced homes

Today’s home buyers are spending around 31% of their monthly household income on a mortgage—$1,595 a month—after a 20% down payment. 

That number is roughly $170 a month cheaper than the 34% required in October. But it’s well above the 20-22% buyers were spending in the decade before the pandemic. In January 2019, the cost of principal and interest was below $900 a month. 

Redfin-monthly-mortgage-payment-Feb-2023-chart

Source: Redfin

Agents are tailoring their buyer advice for this market on two factors: 

  • How long do buyers intend to stay in the homes they buy
  • How well can buyers afford the monthly mortgage payments at 6-7% rates

Demand is more intense for homes at lower price points as higher mortgage rates diminish purchasing power for many buyers, leading them to lower-priced homes. Attractive options at those lower price points are far fewer in number and all but certain to attract more bids. 

Inventory remains low as would-be sellers hold off

Inventory at the beginning of 2023 was as low as in 2021, which was a new record for scarcity. But with mortgage rates more than twice what they were then, buyer demand is far from the white-hot levels seen in 2021. 

Redfin-active-listings-Feb-2023-chart

Source: Redfin

We may not see bidding wars on every for-sale home (worth buying), but buyers should still expect competition, especially in more affordable markets and at lower price points.

Would-be sellers have less incentive to remedy the supply issue by listing their homes since 85% of mortgage holders have rates far below 6% locked in. And, understandably, many are disinclined to trade those in for rates just shy of 7%. 

The decline in new listings has slowed since December (2022), but inventory is still down 17% from a year ago, during the four weeks ending February 12. 

Buyers motivated more by life transitions than by mortgage rate drops

Daunting as those high mortgage rates can be, they’re not the most compelling factor in buyer decisions. Buyers, for the most part, are motivated more by life transitions—new jobs, marriages, and births—that have triggered home purchases for decades. 

Getting the deal of a lifetime on mortgage rates sweetens the pot, but it’s not the main driver. 

For sellers who plunge into the market, those with well-priced and well-marketed homes can expect multiple attractive offers during their first weekend on the market. 

That said, other listings will take longer to sell, and more than a few will need price adjustments.

Last month (January 2023), 22% of home listings underwent a price cut—more than any January for at least five years. 

Home prices will neither plummet nor skyrocket

Asking prices posted an annual increase of 1.2%, marking the smallest increase since the beginning of the pandemic, as sellers price their homes to attract buyers. 

Redfin-Median-asking-price-Feb-2023-chart

Source: Redfin

Waiting for home pieces to either dive or skyrocket is a recipe for disappointment. Home prices are expected to rise on a slow, boring trajectory, much as they have historically, inching a bit higher in spring after the seasonal lows of winter. 

While buyer demand has ticked up in the past few months, new developments with inflation, unemployment, and especially mortgage rates will determine whether that trend continues. 

Mortgage rates will impact both buyer demand and housing supply significantly. If they fall again, toward 6% or lower, they’ll bring more buyers back to the market and make selling more palatable for homeowners, giving inventory a much-needed boost. 

If, on the other hand, they hover in the upper 6% range or higher, buyers will be more likely to stay on the sidelines. And fewer homeowners will be incentivized to sell. 

Inflation, impending rate hikes, and the impact on mortgage rates

The recent 0.5% uptick in inflation, combined with other factors, makes it unlikely that the Fed will ease up on interest rate hikes. March will probably see another increase in the federal funds rate, which will have an impact on mortgage rates.

The somewhat disappointing inflation numbers put a wet blanket on homebuyers after sub-6% rates lit a fire under them a few weeks ago. Inflation is cooling too slowly—and the job market and retail sales are too strong—for the Fed to ease up on interest-rate hikes, which means mortgage rates are unlikely to fall much in the next few months. That doesn’t erase the progress we’ve made and it doesn’t mean rates will soar past 7%. But it is a reminder that the housing-market recovery will remain touch-and-go until we see inflation and the overall economy improve for a longer duration.

Chen Zhao

Redfin Economics Research Lead

The headlines from Redfin and Zillow seem to be at odds, but what they have in common is a recognition of persistent buyer demand in the face of higher mortgage rates and persistent affordability challenges. 

Both also report concerns about inflation and its impact on mortgage rates and, by extension, both buyer demand and housing inventory.

Top takeaways for real estate agents

Your local market may differ considerably from national averages with regard to inventory and buyer demand. So, while it’s vital to keep your finger on the pulse of the nationwide housing market, it’s even more important to understand what’s happening in your own neighborhood. 

For some, buyer demand will rise and fall as mortgage rates drop or climb. Other buyers are tired of waiting and, if they can, they’ll buy when an appealing home option hits the market. 

Help your clients to see the full picture of the market and what it means for them, so they can make informed decisions that will benefit them in the long run.