The housing market remains under pressure as high mortgage rates and elevated home prices continue to challenge both buyers and sellers.
The U.S. housing market is contending with significant hurdles as mortgage rates hover near 7% and home prices remain 55% higher than early 2020 levels, according to the Case-Shiller U.S. National Home Price Index. Years of undersupply and slow home construction have compounded these issues, with builders facing heightened costs and labor shortages. This scenario is expected to lead to a slowdown in home price growth this year as more sellers withdraw properties from the market.
Although housing inventory is showing some improvement, it falls short of meeting demand. A report by the National Association of Realtors and Realtor.com in May highlights this issue. Meanwhile, a recent analysis by Oxford Economics suggests that the market will continue to deteriorate through the year. Matthew Martin, an analyst at Oxford Economics, noted in a report titled “Recession Monitor – Real Test for Economy Is Just Beginning” that the supply of existing homes for sale is moving closer to pre-pandemic levels. Nevertheless, elevated prices, high mortgage rates, and labor market concerns are keeping potential buyers on the sidelines.
The new-home market is also struggling, with builders offering incentives like price reductions to clear unsold inventory. Oxford Economics researchers pointed out that sellers will find it increasingly difficult to transfer price hikes to buyers, leading to more properties being pulled off the market if desired prices aren’t met.
Homebuilders face additional challenges due to tariffs and a reduced labor pool, stemming from fewer immigrants and increased deportations, further hindering inventory growth through slowed housing starts. This scenario exacerbates the existing mismatch between supply and demand in the housing market.
Daiwa Capital Markets analysts Lawrence Werther and Brendan Stuart echoed these concerns, indicating that a substantial improvement in the market is improbable in the short term unless there’s a relief in mortgage rates or home prices, thus alleviating affordability challenges faced by prospective buyers.
The issue of affordability extends to builders, who must continue extending incentives and reducing prices. The persistent undersupply of homes has been a significant driver of the heightened home prices, while new home construction lags behind population growth. Lawrence Yun, chief economist for the National Association of Realtors, stressed in a statement that this shortage is particularly obstructing first-time homebuyers from entering the market.
Danielle Hale, chief economist at Realtor.com, noted that the limited availability of affordable homes is predominantly an issue, with some progress noted primarily in the Midwest and the South. However, Oxford Economics foresees a potential silver lining as labor-market concerns and weak demand could moderate home price growth, consequently discouraging new-home construction.
Although slower home price growth may stabilize sales, Martin pointed out that overall consumer spending will largely depend on the labor market’s conditions. Despite the pressures on the housing market, Oxford Economics predicts the U.S. will sidestep a recession this year. Moreover, it anticipates that the Federal Reserve will begin aggressive rate cuts starting in early 2026, providing potential relief to the struggling market.