Wavering demand allows price appreciation to ease, says Zillow.
Rising interest rates and house prices have made mortgages less affordable now than at any time since 2007. According to Zillow’s latest market report, this has caused housing demand to waver and price appreciation to ease.
“Mortgage rates took an unprecedented leap skyward over the past two weeks and quickly multiplied housing costs as they rose,” said Zillow economist Nicole Bachaud. “We are already seeing signs of waning demand, and expect these recent rate hikes to quicken the market’s needed rebalancing. While shoppers will likely experience less competition for homes than the frenzied recent months, their purchasing power has dwindled.”
The Zillow report said that the most significant hurdle to housing affordability is the widening gap between incomes and mortgage costs. Based on the company’s data from April, monthly payments are already taking up 28% of homeowners’ monthly income, just below the 30% threshold for what is considered a cost burden. With mortgage rates having surged beyond April’s average, this share is likely “at or very near 30% already.”
In fact, even as rent prices ballooned since the start of 2021, mortgage payments are still more expensive in most of the US. According to Zillow, a typical rent payment in May ran higher than a mortgage payment in only five of the country’s 50 largest metros. In 2019, rent was more expensive than mortgage payments in 28 of 50 metros.
The report also noted that home values have begun to turn a corner, with May seeing a slightly slower pace of annual growth at 20.7%, down from 20.9% in April. According to Zillow, this signals the possibility of the market having passed an inflection point for home values between April and May.
“Arriving in the middle of the spring selling season, this deceleration is a clear signal that buyers are dialing back their demand for homes in the face of daunting affordability challenges,” said Jeff Tucker, senior economist at Zillow.
House sales have also shown signs of slowing down, with Zillow reporting that the number of for-sale listings that went under contract in May decreased by nearly 20% from 2021, when activity was at a four-year peak, and 2% from 2019. The median time on market for new listings was found to be just seven days, holding steady from April and even with last May.
The share of listings with a price cut has gone up as well, rising to 11.5% in May from a recent low of 8.5% in February.
The inventory of for-sale listings has been steadily climbing, sitting at just 14.2% below the level reported last year and 50% below the level in 2019.