Key takeaways

  1. Home affordability is at one of its lowest points since the peak of the 2000s housing bubble
  2. Mortgage rates have increased significantly over the last year, making home buying difficult for many 
  3. Home prices have only declined modestly, with low demand and low supply limiting further declines
  4. Catalyst needed to cause a significant drop in home prices; likely mortgage rates need to fall or prices decline further

It is the waning days of winter on the calendar, but for the U.S. housing market, we see chilly conditions continuing for some time to come. Unlike in 2008, today’s housing market isn’t crashing so much as it is frozen. There are few buyers or sellers, and thus prices have barely moved lower despite a surge in mortgage rates. Here are some thoughts on the state of the market today and where we think it is headed next.

Many buyers are finding homes difficult to afford

Mortgage rates have risen at a historic pace over the last year, jumping from 3.11% to 6.41% over the course of 2022, according to Freddie Mac. That marked the largest increase over a calendar year in Freddie Mac’s history. Since around 70% of homes are bought with a mortgage, higher mortgage rates tend to make homes less affordable. According to the National Association of Realtors, home affordability is about as bad today as ever since the peak of the 2000s housing bubble.

homebuyer affordability


With high mortgage rates making home buying so expensive, demand from buyers has dropped substantially. According to the Mortgage Bankers Association, mortgage applications for purchasing a home hit its lowest level since 1994 during the week of February 17, 2023.

Prices have only declined modestly

Given the plunge in affordability in the chart above, you might think home prices would have fallen more significantly than they have. Since June the S&P CoreLogic Case-Shiller index of housing prices has declined by almost 3%, but prices are still higher than they were at the start of 2022.

S&P Home Price Index


Why haven’t prices fallen further? Because while demand has fallen substantially, so has supply. In other words, at the same time, the large run-up in mortgage prices made homes less affordable for buyers; it also made them unaffordable for sellers. The chart below shows the average rate on existing mortgages in blue vs. the rate for new mortgages in orange

Gap between existing rates


  • Blue bar: the average rate everyone who already has a home pays
  • Orange line: the rate you will pay if you take out a mortgage

Right now, there is almost a 3% gap between the two, which means if anyone decides to sell their house to buy another one, they immediately face a massive jump in interest costs. This likely has discouraged many sellers from listing their homes for sale. 

A rapid decline in new construction has also impacted the supply of homes for purchase. New construction starts for January were down 31% vs. the start of 2022. 

This helps explain why home prices have only drifted lower in the last few months. Overall, there is a lack of buyers and sellers, little demand, and low supply.

How far will home prices fall?

It seems likely that affordability needs to improve before the housing market thaws meaningfully. This means either mortgage rates need to fall or prices must keep declining.

That being said, we don’t see the catalyst for home prices to drop by a large degree. Most people choose to buy their first home because of a life event, like choosing to start a family. Those life events keep happening, and thus there will be an increasing amount of pent-up demand for homes. These are people bound to become buyers if home prices keep declining.

Meanwhile, sellers aren’t going to be more motivated to sell as prices decline, and we don’t expect many will be forced to sell. Unlike during the housing bubble’s aftermath, homeowners are comfortably affording their current payments on average. According to the Federal Reserve, mortgage payments were only 4% of total consumer income. That figure was over 7% in 2007 and 2008. So current homeowners do not need to sell at lower prices. If prices fall too much, the supply of homes will shrink even more.

We think mortgage rates will be the key to normalizing housing market activity. Lower rates will make transactions more palatable for both buyers and sellers. But until that happens, we think the recent trends will probably persist—a slow decline in home prices with historically low levels of buying and selling.