The new hurdle of higher mortgage rates was the main reason why buyers found the housing market in late 2022 attractive — lower prices and more inventory.
Mortgage rates hovered at 3% in the early days of mortgages. They played a minor role in homebuying budgets and encouraged potential buyers to make their money. Buyers had to be more aware of the effect of interest with each percentage point increase.
The first quarter of 2022 saw mortgage rates rise from their pandemic lows. They reached their peak in the fourth quarter, when 30-year fixed-rate mortgages topped 7% in October and November. With that peak, the demand for homes fell.
There were fewer buyers in the fourth quarter last year and home prices fell 5% nationally. However, inventory increased.
Accessibility improves almost everywhere
The fourth quarter of 2022 saw a higher average income go towards the purchase of homes than the third. Nationally, the average income of first-time home buyers was 5.4 times, as compared to 5.7 for the third quarter.
Both income and home prices are key factors in this affordability ratio’s positive shift. Real income increased and prices fell. However, houses remain very expensive, especially when you consider that the rule of thumb (albeit outdated) states that buyers should look for homes at three times their income.
Two metro areas were found to be affordable for the first time since the analysis started in the fourth quarter 2020. Pittsburgh was listed at 2.6x first-time home buyer income and Cleveland at 2.9x first-time buyer income.
In two metro areas, there was a slight decline in home affordability. Kansas City homes were listed at 5x first-time buyer’s income, compared to 4.9x in the previous quarter. Milwaukee saw a rise to 4.8x first-time buyer’s income, compared with 4.7.
To see a table showing affordability metrics for all locations, click here
First-time buyer advice: It is impossible to search for homes that are three times the price of your income in most areas. Your search results will be almost empty. Instead, look at the homes that are being sold in your area and decide if those prices are reasonable given your financial situation. Your target price range will be determined by your other debt obligations, current mortgage rates, and your down payment. You can use a home affordability calculator to help you.
Demand (and prices!) fell due to high mortgage rates
The fourth quarter saw a drop in demand due to relatively high mortgage rates. This led to price drops in some markets and a pause for the hot price growth.
After inflation adjustment, list prices dropped 5% nationally and 3% in the most populous metros. Prices rose in eight metros, but they were modest and ranged from 1% to 3 percent.
This may be due to seasonality. Prices tend to fall in the fourth and first quarters, before rising in the spring. The lulls in growth are a pleasant sight, and something that we haven’t seen for the past two (unusual!) years.
First-time buyer guidance: Sellers may be able to command higher prices during warmer months due to rising demand in spring. However, buying in the coldest months of the year to save money usually comes with a trade-off: there are fewer homes being listed. Buyers, especially first-time buyers should focus their attention on the home that is within their price range. You can keep an eye on the market while building a down payment, and work on your credit so you are ready to jump at the opportunity when it comes up, regardless of the season.
The number of homes that are on the market in winter months is similar to the price. We didn’t notice this seasonal trend in quarter 2022, when the number listing increased 1% across most metros and 2% nationally.
The inventory levels in 2021 are showing a marked improvement. There were 44% more listings in the country in Q4 2022 than a year ago. The active listings in the most populous areas of the country grew 63% over the previous year.
For a table showing quarterly and annual changes in homes available, by area, click here
First-time buyer guidance. While having more homes to choose is a good thing, buyers need to be open to change. Many local markets still have a deficit. There aren’t enough homes for people who can afford them to purchase. You can have an idea of your dream home, but you should also consider all the compromises that may be necessary. Also, create a list of things you want and a list of must-haves. You’ll most likely find a home that is somewhere in between these two.
In areas where inventory has reached pre-pandemic levels
Home inventories fell by as much as half between 2020 and 2021 during a period when low rates drove demand extremely high. This tilted the market power completely in the favor of home sellers. However, supply is starting to rebound.
Five metropolitan areas had more inventory in the fourth quarterly of 2022 than they did in the fourth quarterly of 2019. This was the quarter that saw the outbreak of the pandemic. These areas are some of the most popular markets in recent years. They include Phoenix, which had 24% more listings, Austin (+10%) and Salt Lake City (+9%), as well as San Francisco, which had 7% more listings than the three-year prior.
The COVID-19 pandemic didn’t cause a flood of home listings in the nation. However, the problem of a shortage of homes has been a problem for three years. A return to pre-pandemic inventory may make home shopping less frustrating and balance the power of buyers and sellers.
Some markets still have some way to go. Hartford, Connecticut’s metro area has the farthest distance from pre-pandemic inventory. There are 249% fewer listings for Hartford than three years ago. Providence, Rhode Island (-133%) and Virginia Beach (-130%) still have significant shortages.
The monthly median list price and the list count are based on monthly inventory data from Realtor.com’s residential listings database, January 2023. All nominal list prices were adjusted using the U.S. Bureau of Labor Statistics Consumer Price Index. All monthly median figures were converted into quarterly averages.
According to the 2022 Profile of Home Sellers and Buyers of the National Association of Realtors, 36 is the median age of first-time buyers. The U.S. Census Bureau’s 2021 American Community Survey metro level median household income for households aged 25-44, which is the range most likely to include most first home buyers, was used to calculate the estimated income of first-time buyers. It was then adjusted to December 2022 dollars by the Bureau of Labor Statistics Employment Cost Index.
Take care when interpreting metro rankings. There may be overlap between affordability ratios due to rounding and margins of error in income data.
San Juan (Puerto Rico) is one of the 50 most populous metropolitan areas. However, it was not included in the analysis because there were insufficient inventory data.