• Typical U.S. home values are rising at pre-pandemic rates, and look to stay the course
• Inventory is at seasonal record lows, but builders are adapting to fill the gap
• Rent inflation is finally retreating as rent growth returns to long-term trends

Beginning in early 2022, rising inflation and efforts to curb it helped to cool the housing market that had spent the previous two years soaring to never-before-seen heights. The market experienced a dramatic slowdown, but prices bottomed out in early 2023 and a crash seems to have been avoided. The nation’s typical home value and typical asking rent have both returned to normal pre-pandemic growth rates. However, despite this resilience, challenges persist for the market as a historic dearth of new for-sale listings is blocking many would-be buyers and sellers from taking the next step in their housing journeys.

Prices

The nation’s typical home value rose at a double-digit percent annual pace for 14 straight months, from spring 2021 to summer 2022, touching a record high of 19.1% in July 2021. This record-setting home value growth was largely supported by both market fundamentals and pandemic-driven factors. Home buying demand spiked as the huge Millennial generation entered prime home buying age, and ultra-low mortgage rates combined with the remote work boom spurred by the pandemic added fuel to the fire. 

Demand cooled off as mortgage rates doubled over the course of 2022 – rising to roughly where they stand today. Home values fell in the second half of last year, but the same low mortgage rates that supercharged pandemic demand also help to put a floor on how far home values could fall. Monthly payments remain affordable for the many homeowners who locked in long-term mortgages when rates were near record lows. It would have taken a surge of desperate sellers flooding the market for a sustained home value decline, and that never materialized.

New listings and sales volume

Somewhat paradoxically, the main reason for prices’ resilience is also presenting the most extreme enduring challenge to the market going forward. For the many homeowners who locked in long-term mortgages when rates were near record lows in 2020 and 2021, monthly payments remain affordable, leaving them little incentive to uproot and take on new financing and face hundreds more dollars each month in housing costs. As a result, the inflow of new for-sale listings to the market has been far weaker than what the market has experienced in years past. New listings in June trail pre-pandemic norms by about 25%. Zillow’s weekly measure of for-sale inventory shows that there are fewer homes listed 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. Sales volume has slowed as a result: The seasonally adjusted annualized rate (SAAR) of existing home sales – as measured by the National Association of Realtors – fell to  4.16 million in June, the series’ fourth decline in five months and an 18.9% decline from a year earlier.

New construction helping to fill the void

Homebuilders, seeing an opportunity to fill a dire need for houses, are exhibiting more confidence and have accelerated activity in recent months after a sluggish end to 2022 and beginning to 2023. Seasonally adjusted rates of single-family home construction starts have improved in five straight months and now sit at their highest level since June 2022. New multi-family construction hasn’t shared the same reacceleration, but a record-high backlog of multi-family homes still being built should bring additional relief to a market starved for more inventory. In fact, Zillow research finds the U.S. is 4.3 million homes short of what is needed to house all the families currently doubling up with non-relatives — and newly built homes are becoming a bigger piece of the sales pie. 

Builders are also changing tactics to confront cost pressures that high interest rates have laid on both them and their customers, with detached single-family homes giving way to more economical options. They’re also more likely than homeowners to offer attractive financial incentives to buyers.

Rent

The resilience of for-sale home prices has been matched, to a degree, in the rental market. Annual changes in rent – as measured by the Zillow Observed Rent Index (ZORI) – continue to decline after reaching a series high in February 2022, but monthly changes in the measure have returned to pre-pandemic norms. ZORI grew 0.6% in June from May, virtually identical to the average June increase of 0.6%, averaged over data from 2015 to 2019. 

The continued deceleration of annual rent changes bodes well for shelter components of key measures of inflation. As we predicted late last year, the shelter portion of the CPI – which comprises about a third of the overall index – has started to see shrinking annual increases, following ZORI’s lead.

Forecast

Projecting the path forward for the housing market is difficult at any time, particularly in such unique economic conditions. But the combined forces that yielded today’s environment of buoyed prices and low sales volume appear likely to inform the market’s path forward in the coming months. Our official forecasts project home prices to end 2023 5.5% higher than where they started it. And while we project 4.2 million existing home sales to close this year – the lowest calendar-year total since 2010 – we expect annual declines to abate by early 2024 and for home sales to stabilize at low levels through early next year.

While elevated mortgage rates will continue to cap listing and sales activity, underlying data illustrate enduring interest in buying and selling when the price and time is right. Data from our Population Science team’s Quarterly Survey of Homeowner Intentions and Preferences shows that, as of Q2 2023, 23% of homeowners intended to sell their home within the next three years – up from 15% in Q2 2022 and the highest level in the survey’s history, which dates back to 2021. More broadly, demographic factors such as a continued increase in the prime (25-44) home buying-aged population should support market activity as it seeks to emerge from a tumultuous period.