Would-be home buyers waiting for home prices to meaningfully decline before they enter the market should think twice. U.S. home prices are expected to continue growing through at least the end of next year, National Association of Realtors (NAR) Chief Economist Lawrence Yun said in a recent address to real estate agents from Compass, Inc., the largest residential real estate brokerage in the United States.

Current NAR forecasts call for U.S. home prices to end 2022 up 10% from 2021 and to rise another 1% through the end of 2023. Yun recently spoke to hundreds of Compass agents as part of the company’s September Compass Update, a monthly review and conversation of real estate market trends hosted by Compass Senior Managing Director Elizabeth Ann Stribling-Kivlan and open to all Compass agents nationwide.

NAR data show sales of existing homes fell in August for the seventh straight month, down 0.4% from July and 19.9% from August 2021, to a seasonally adjusted annualized rate of 4.8 million – well below recent highs exceeding 6.5 million as recently as early 2021. The median U.S. Home price rose 7.7% year-over-year in August, to $389,500. Despite the sales slowdown, closed transactions did not fall by as much as expected, and sales in both the Northeast and West regions were somewhat higher in August than they were in July.

“The ongoing uncertainty and volatility posed by rising interest rates, high inflation and limited inventory have combined to lower the housing market’s speed limit, but August data prove there is still some gas in the tank,” said Compass President Neda Navab.

Rising Rents, Limited Inventory, Lingering Competition to Boost Prices

Yun noted several reasons why prices were unlikely to meaningfully fall nationwide any time soon, despite an ongoing slowdown in sales volumes. Limited inventory is likely to keep upward pressure on prices, as the supply of homes remains inadequate to meet pent up demand from aging millennials and others who may have been shut out of the market during the past two years of explosive, pandemic-fueled growth. Rapid growth in rents is also likely to help contribute to ongoing home buyer demand, Yun said. Even as costs of homeownership keep rising, rent growth has been even more pronounced, and buying is still viewed as a safer long-term financial bet by a large majority of Americans.

Yun compared the current environment of persistently high inflation to the early 1980s, when inflation was also high and mortgage interest rates were surging. Then, like now, home prices did not meaningfully decline even as affordability suffered.

“Back in the early 1980s, mortgage rates quickly shot up, from 9% to 18%, to fight inflation. But did home prices crash during that time?” Yun asked. “The answer is no. Home prices still rose because rents were also rising.”

While some home buyers have hit pause or stepped back from the market in recent months as rising costs forced them to re-evaluate their budgets, Yun said that their pullback created an opportunity for other buyers that may have lost out during the ultra-competitive past few years. When bidding wars and all-cash offers were more prevalent, many buyers – especially those seeking more affordable homes and/or utilizing lower-cost, federally backed mortgages – had a harder time competing.

“Last year, those buyers using more-affordable FHA mortgages, VA mortgages etc, had no chance to compete,” Yun said. “But now they have some chance of competing, and they are in the market.”

Yun also said that competition is still fierce in pockets of the market, despite the cool down in sales volume and more frequent price cuts, with a small majority (51%) of homes still selling at or above their list price. “There are still some residual multiple-offer situations out there driving prices up,” Yun noted.

Rate-Lock, Affordability Remain Challenging

Yun said he expected localized price declines in already-pricey markets like the San Francisco Bay Area, where even small increases in mortgage rates can mean a lot more money needed to cover a monthly mortgage payment. But widespread declines on a national scale like those experienced during the 2008-era housing crash are highly unlikely, Yun said. And the relative financial health of homeowners is much better now than it was in 2007 and 2008, which should help insulate the market from a surge in foreclosures like that which characterized the last downturn.

“In a tight inventory condition, there’s not going to be any price crash,” Yun said. “The most I see is in San Francisco, maybe 10% or 15%. But in middle America, say Cincinnati or Indianapolis, they might not see any price declines in these markets.”

The market is not without its challenges, however. Current homeowners that might otherwise choose to move to a different home under different conditions may stay put because they do not want to give up their currently low monthly mortgage rate and payment. This so-called “mortgage rate lock-in” will both keep inventory lower than it might otherwise be, and depress transaction levels, which Yun said he expected to fall 15% year-over-year in 2022 and another 7% in 2023.

Yun also said that home affordability, which has suffered as both bottom-line home prices and monthly financing costs driven by higher mortgage rates have risen, may improve only modestly over the next year as wage growth exceeds home value growth. Mortgage interest rates, he said, are unlikely to fall meaningfully anytime soon – though they may also be nearing a peak around 7%, assuming the market has correctly priced in anticipated future Federal Reserve rate hikes. If the path of future hikes is more aggressive than anticipated, Yun said rates could reach into the 8% or higher range before stabilizing again.