As Inflation Cools, Expect A More Competitive Housing Market

Daryl Fairweather
Forbes June 22, 2023

Homebuyer competition is expected to intensify as inflation cools.
Now that inflation is waning, there is hope that mortgage rates will fall to 5%
in 2024. These lower rates would make borrowing to buy a home less
expensive, but they could make the housing market much harsher for firsttime homebuyers. That’s because a drop in mortgage rates would cause an
increase in demand, and more demand without more supply is a recipe for
competition. Like in 2021, we could see a spike in bidding wars, with the
typical home selling above its asking price in record time. First-time buyers
should prepare for a challenging road ahead as inflation dies down.
Inflation has held the housing market back
Inflation primarily affects homebuyers through mortgage rates. When
mortgage rates increase, buyers must make higher monthly mortgage
payments to afford the same-priced home. Inflation alone can increase
mortgage rates. And the Fed’s tools against inflation also impact mortgage

When the economy is on a path toward higher inflation, lenders must raise
mortgage rates, or else the loans they make will become less valuable. For
instance, suppose a borrower has a fixed-rate mortgage with monthly
payments of $1,000 each month. If inflation is 5%, $1,000 a year from now is
worth only $950 in today’s dollars. However, if inflation is 2%, $1,000 a year
from now is worth $980 in today’s dollars. Therefore, the lender is more
willing to lend when inflation is low.

Another way that inflation affects mortgage rates is through the actions of the
Federal Reserve. As the Federal Reserve raises the Federal Funds rate in its
fight against inflation, lenders must raise mortgage rates to offset their
increased borrowing costs.

During the pandemic, mortgage rates fell to record lows. Homebuyers and
homeowners were able to lock in 3% fixed-rate mortgages. Now that mortgage
rates are close to 7%, homebuyers have backed off of the market, and so have
home sellers. That’s because if homeowners sell, they aren’t just handing over
their home; they abandon their rock-bottom mortgage rate. Newly built
homes have added slightly to the number of homes for sale. Still, there are
nearly 40% fewer homes for sale now than there were pre-pandemic.

More competition is coming

Assuming inflation wanes, and the economy remains in good shape. Mortgage
rates could decrease from 7% to around 5% in 2024. In that scenario, many
prospective homebuyers will return to the market. But unfortunately, that
won’t be enough to motivate most homeowners to sell. A homeowner who is
looking to move into a home that is the same price or more expensive than
their current home will have to spend hundreds of dollars more per month on
a mortgage and pay up to 6% of their home’s value in real estate fees.
Expensive markets like San Francisco and Seattle will have more homeowners
willing to sell. Those home sellers can use their equity to confidently compete
with cash on a lesser-priced home in a more affordable place. Consequently,
competition will increase the most in hot migration destinations like Phoenix
and Tampa, where homes are still relatively inexpensive.

Cash will still be king

As the number of homebuyers grows without an increase in sellers,
competition in the housing market will intensify. As sellers regain the upper
hand, they will increasingly reject bids with low down payments in favor of
buyers with cash. FHA loans, meant for low- to moderate-income borrowers
and popular with first-time homebuyers, have lower down-payment and
credit-score requirements than conventional loans. The share of buyers using
FHA loans is at its highest level since before the pandemic. That’s because
right now most home sellers feel lucky to receive any offer at all, including
offers from FHA borrowers. However, that could quickly change when low
mortgage rates bring more buyers to the market.
When competition picks up, sellers will prefer buyers flush with cash who
waive the home inspection and financing contingencies. Homes won’t
necessarily sell for higher prices right away. However, it will likely become
more difficult for first-time buyers to compete. Just like in 2021, it would
become the norm for homes to sell in record time, with multiple bids, for tens
of thousands of dollars above the asking price.
Buy now or later?
Homebuyers should brace themselves for the changing dynamics in the
housing market. Today’s housing market isn’t easy, but at least sellers are
willing to make concessions and accept low down payment offers. In the
future, buyers will have to move quickly and make aggressive bids to be
successful. Although mortgage rates will likely be lower in the future, it may be
prudent for first-time homebuyers to purchase now before competition
intensifies. Because homeowners can refinance their mortgages at a later date,
buying now and taking advantage of low mortgage rates later may be the best