Home Sale Prices Are Up 4 Months in a Row. When Will Buyers Get Relief?

Given how expensive mortgage loans have gotten, you'd think buyers would be running the other way rather than seeking out listings. But the fact that home prices have risen for four consecutive months, according to the National Association of Realtors, tells us that buyer demand is quite strong.

In October, the median existing home sale price was $391,800. That's a 3.4% increase from a year prior and the fourth consecutive month of annual home price gains. It's also a lot of money to be paying at a time when mortgage lenders are charging 7.44% -- the average rate as of this writing -- to sign a 30-year loan.

In fact, let's say you're looking to buy a property worth $391,800 and are putting 20% down at closing. At a mortgage rate of 7.44%, you're looking at a monthly payment of $2,179 for principal and interest. That doesn't account for other homeownership costs, like property taxes.

Unfortunately, though, home prices could remain high for many more months. Here's why.

It's all about a lack of inventory

When there's not enough supply of a given commodity that's desired, its price tends to rise. That's what's happening in the housing market today.

The reason home prices are up is that sellers are being forced to compete with one another due to limited inventory. As of late October, there was only a 3.6-month supply of homes available for purchase. It can often take up to a six-month supply of properties to meet buyer demand in full.

Since buyers are being forced to duke it out over the same properties, they're no doubt still engaging in bidding wars to some degree. Granted, bidding wars may be less prevalent now than in 2020 and 2021, when mortgage rates were at record lows. But all told, there's still a lot of competition. And that explains why home prices are up.

When will home prices start to cool?

For home prices to start dropping, real estate inventory needs to pick up. But unfortunately, housing inventory is unlikely to increase until borrowing rates drop.

Many people are sitting on mortgages now with much lower interest rates than 7.44%. And why would someone with a 3% mortgage want to sell their home, only to have to finance a new one at more than double that rate?

Now, in the coming year, the Federal Reserve could start to cut interest rates if inflation continues to cool nicely. That could be enough to drive mortgage rates downward.

But even so, it's unlikely that rates will get anywhere close to 3% anytime soon. And that means housing inventory could remain sluggish for many more months -- even years. That's not great news for buyers, but it's the reality they may have to accept.

Know how much you can afford to spend

As a buyer, you may not get much relief when it comes to home prices anytime soon. So your best bet is to figure out how much house you can afford to take on and accept that you'll probably end up spending more than someone who bought a home before the pandemic.

As a general rule, it's best to keep your total housing costs to 30% of your take-home pay or less. That 30% should include not just your mortgage payment, but also, property taxes, insurance, and other recurring housing expenses that may apply to you.

At some point, mortgage rates are likely to fall to more attractive levels, and you can look to refinance your loan then. But make sure you can afford your home from the start, since an opportunity to refinance may not present itself for several years.