The United States is currently experiencing a typical peak season for home purchases; however, indications point to a persistently lethargic market. A notable decline in housing contract activity occurred in April, despite an increase in available inventory. Buyers and sellers seem to be at odds: while more properties are being listed, prices have not dropped significantly, and buyers remain selective. Compounding the issue, mortgage rates have remained remarkably stable this year, hovering between 6.8% and 7%, which discourages many potential buyers.

Over the past few years, the housing market has been constrained by what experts refer to as the "rate lock-in effect." Homeowners fortunate enough to secure sub-4% mortgage rates during a period when prevailing rates are closer to 7% are reluctant to relinquish their advantageous rates by moving. This phenomenon has contributed to a shortage of homes on the market. Although inventory has been expanding recently, offering prospective buyers more options, list prices in many areas continue to rise, leaving many priced out.

Economists anticipate a slight decrease in home prices nationally this year, potentially ranging from 1% to 2%. However, this modest adjustment comes after a significant 38% increase from pre-pandemic levels. The affordability gap has widened dramatically, with higher mortgage rates drastically reducing buying power. For instance, a family earning the median US income of approximately $80,000 could afford a home costing up to $543,000 with a 3% mortgage rate. At a 7% rate, their purchasing power drops to $356,000, less than the current median home price.

In response to these challenges, many priced-out buyers are opting to rent instead. Historically, owning a home has cost more than renting, considering maintenance, insurance, and other ownership-related expenses. Following the pandemic, the cost premium for homeownership escalated rapidly alongside rising prices and mortgage rates. According to John Burns Research & Consulting, the monthly premium for owning a starter home was over $1,000 by late 2024, compared to an average of $233 historically.

Federal Reserve Chairman Jay Powell acknowledged these market difficulties, noting the long-term housing shortage and current high rates. He emphasized that restoring sustainable price stability and fostering a robust labor market would benefit the housing sector most effectively. The path forward remains uncertain, but lower rates could provide some relief, although a return to pre-pandemic levels seems unlikely without significant economic shifts.