As Buyers Hit Budget Ceiling, Sellers Adjust Expectations

The shock that came from rising rates and falling prices is wearing off as both buyers and sellers start to accept current market conditions. Zillow Economist Nicole Bachaud highlights three main factors affecting the market.

1. High mortgage rates and prices are pushing affordability — as measured by the share of income spent on a mortgage payment — to a level not seen since 2006. 

Takeaway for agents: “When we look at why home values have been dropping so significantly, particularly in the west, we point to affordability, which we measure as the share of income spent on a mortgage payment,” Bachaud says. “The share of income that’s spent on a mortgage payment is currently at the highest value in our series, at over 38% — higher than the peak in 2006. 

“This year, since mortgage rates have been so high for so many months, we’ve suddenly gotten to a point where affordability has reached that previous ceiling. Once we saw affordability reaching a point where the typical household is spending over a third of their income on a mortgage payment, all of a sudden home values responded with two months of consecutive drops.”

“People are just not able to transact in these markets anymore. This may be a reason why all of a sudden we’re seeing markets flipping a switch and going in a completely different direction.”

2. These factors mean that buyers, especially first-timers, are driving the current housing market. 

Takeaway for agents: “In 2022, the share of first-time buyers has increased back to 2018 levels,” Bachaud says. “That has a lot to do with the fact that repeat buyer-sellers aren’t entering the market. Homeowners are saying, ‘I have a 3% interest rate, why on earth would I go buy a more expensive home at a 6% rate?’ So we’re going to see a lot more people focus on the houses that they live in, versus doing that trade up. This is especially true as rates are now in the high 6’s. These shifts in mortgage rates make a big difference for buyers’ budgets.”

“Agents are likely going to be facing a lot more first-time buyers, because they’re the people who are in the market. Whether or not they can afford it, those are the people who are in the market.”

3. Bidding wars — and price cuts — are disappearing as sellers who do enter the market adjust their expectations. 

Takeaway for agents: “We’re starting to see a lot of sellers coming to terms with what’s going on in terms of prices,” Bachaud says. “They’re now saying ‘OK, I’m not going to list my home as aggressively so I don’t have to cut the list price, I’m going to try and understand what the actual value of my home is now that things are slowing down.’ So we’ll likely see price cuts continuing to level off and probably dropping throughout the rest of the year.”

“Same thing with bidding wars. We’re seeing way fewer bidding wars happening across the country, and a lot of that has to do with the fact that there’s less demand. It’s really in the western markets — like Phoenix, Salt Lake City, Sacramento and Denver — where we had these affordability challenges, and they’re seeing the biggest pullback in competition. That’s going to continue to be a narrative throughout the rest of the year, as these markets try to find their normal.”