Cheap mortgages kept housing from crashing but also subdued inventory: Zillow

Cheap, pandemic-era mortgage rates that are keeping homebuyers locked into their existing deals are also why the housing market avoided a crash, Zillow said in a report.

Historic low, in some cases below 3%, mortgage rates spurred a pandemic-era housing frenzy that pushed home prices up. They are also why two years later, homebuyers can still afford their mortgage payments, according to Zillow. 

Inflation is cooling, but prices for most things, including housing, remain high. The Federal Reserve has raised rates 11 times since last year as it seeks to bring inflation down to a 2% target rate. Mortgage rates have responded by rising nearly 7% in recent weeks, cooling demand for housing.

That pullback in demand was initially predicted to trigger a crash in home prices because some sellers would be forced to slash prices to shed inventory. However, the flood of homes for sale has yet to manifest primarily because those low mortgage rates continue to make payments affordable, according to Zillow. 

At the start of this year, Zillow's forecast for 2023 home values called for a 0.7% decline. Now, Zillow expects 5.5% growth in 2023 — roughly in line with an average year. 

"Home values fell in the second half of last year, but the same low mortgage rates that supercharged pandemic demand for purchases and refinances also put a floor under how far home values could fall," Zillow said. "Existing homeowners have largely chosen to stay put rather than purchase another home with a much higher mortgage rate, which would cost hundreds of dollars more each month."

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Home prices gaining as supply remains low

Low mortgage rates are also behind one of housing's biggest challenges right now – a lack of inventory, according to Zillow. Homebuyers are reluctant to trade in their existing low rates for today's higher financing costs, which has created a shortage of existing housing supply. 

New listings in June trailed pre-pandemic norms by about 25%, and there are fewer homes available for sale today than any year in recent memory at this time of year, including the ultra-low inventory environment of 2021 and early 2022, according to Zillow.  

Sales volume has slowed as a result of limited housing supply. The seasonally adjusted annualized rate (SAAR) of existing home sales fell to 4.16 million in June, the series' fourth decline in five months and an 18.9% decline from a year earlier, according to a report by the National Association of Realtors (NAR).

"The housing market is stabilizing after the turbulence of the pandemic, but the effects will be with us for a long time," Zillow Senior Economist Jeff Tucker said in a statement. "Price appreciation is back to normal after a short reset, but that means buyers still face serious cost challenges and competition, especially for the most affordable houses and in less expensive markets."

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Fall housing may bring more of the same

Buyers hoping for some relief as the market moves into the fall and winter may find little, according to Zillow. These are the top two trends buyers can expect in the short term:

Home prices are likely to keep gaining

Zillow has predicted that home prices will end the year 5.5% higher than where they started. However, mortgage rates may drop in the long term if inflation continues to recede, but not to the historic lows seen during the pandemic.

Housing supply will improve

The good news is that the housing supply is expected to improve. Twenty-three percent of current homeowners said they are considering selling their home in the next three years or currently have it up for sale, according to a recent Zillow survey. 

More housing supply should help calm competition and help stabilize home prices, making it easier for those considering new mortgages to budget and plan, according to Zillow.   

If you're ready to shop around for a mortgage loan, you can use the Credible marketplace to help you easily compare interest rates from multiple mortgage lenders and get prequalified in minutes.

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