Housing Market Update: Home Prices Reach Troubling Milestone

Insufficient supply of homes in the market is pushing up prices, Wells Fargo economists said, making it tougher for Americans to afford a home amid elevated mortgage rates.

The median sale price of an existing home rose by more than 5 percent in January, according to the National Association of Realtors, even as sales rebounded from their previous months' doldrums to jump by more than 3 percent. But the housing market still faces a supply crunch. Properties available for sale at current prices equate to about three months of supply, lower than last month and even lower than in November.

The sale price for a home came in at a little over $379,000 on the back of limited supply in January, a record high.

"[It marked] the highest sales price ever for the month of January and the seventh consecutive month of year-over-year price gains," Wells Fargo economists pointed out.

Mortgage rates declined to mid-6 percent from their record peak in the fall of 2023, but they have ticked back up in recent weeks. On Thursday, Freddie Mac revealed that the average 30-year fixed rate was at nearly 7 percent.

Buyers took advantage of lower rates toward the end of last year and the beginning of 2024, which contributed to a jump in prices. But high mortgage rates are also stifling supply, adding to the price pressure.

Nearly 90 percent of homes in America have rates below 6 percent, according to real estate platform Redfin, which means sellers are reluctant to relinquish the cheaper home loans and enter a market where a 30-year fixed rate for a home is above 7 percent.

"With homebuyers taking advantage of lower mortgage rates, low levels of inventory have kept upward pressure on prices," according to Wells Fargo. "The combination of relatively higher mortgage rates and higher home prices will continue to make housing less affordable to many potential homebuyers."

The outlook for the housing market depends on what happens with the borrowing costs in the coming months. The Federal Reserve instituted aggressive rate hikes to battle soaring inflation. The increases made loans expensive, including mortgages. At their last meeting, policymakers signaled that they are done with increasing rates from their current 5.25 to 5.5 percent as inflation cools.

Experts expect the market to improve when the rates come down.

"We expect rates to resume their decline later in the year as the Federal Reserve's rate cuts draw closer," Nancy Vanden Houten, lead U.S. economist at Oxford Economics, said on Thursday in a note shared with Newsweek.