^{April 22, 2024 | Reading Time: 2 Minutes}

Considering the present market landscape, where affordability is stretched, we can foresee a gradual correction rather than an abrupt crash. While short-term price increases may occur due to factors like declining interest rates and reentering buyers, sustained growth appears unlikely. Instead, we should anticipate a slow adjustment period, possibly spanning several years, before significant price increases materialize.

The proportion of income necessary to afford a home will eventually need to adjust. This issue is particularly pronounced in California, where high housing costs have prompted significant out-migration. Despite this trend, the market has been buoyed by international and domestic buyers stepping in to fill the gap left by those leaving the state. However, this imbalance is not sustainable in the long term, as inflation will gradually correct this issue over time. Consequently, this may foresee a prolonged period of relatively stagnant home prices.

As for future price appreciation, it is unlikely to be substantial in the coming years. The current equilibrium between supply and demand is the primary factor preventing a decline in valuations. Rising interest rates may prompt homeowners with low mortgage rates to hold onto their properties, while prospective buyers awaiting better rates funnel into new construction projects. This influx of demand for new homes could potentially disrupt the delicate supply-demand balance, leading to an oversupply of housing inventory.

Those homeowners with exceptionally low mortgage rates would be reluctant to sell, even in the face of rising interest rates. Instead, they’re more likely to retain their current homes, perhaps even as rental properties, to preserve their favorable mortgage rates. The potential surge in new home purchases wouldn’t come from current homeowners with low interest rates but rather from renters who are finally able to qualify for mortgages as rates become more favorable. Look for builders to offer financing incentives. By leveraging their profit margins, builders could effectively “buy down” financing rates, ensuring that mortgage rates remain competitive and thus stimulating demand for new homes. This strategy could help sustain buyer interest in new construction projects and prevent a glut of housing inventory from materializing.