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In 2022, hopeful homebuyers were up against sky-high interest rates and rock-bottom inventory deficits. These factors put homeownership out of reach for many people, particularly first-time buyers, who saw monthly mortgage payments on a typical starter home balloon by 49 percent in just one year, according to the National Association of Realtors (NAR). Single-family home prices rose 8.6 percent from the third quarter of 2021 to the third quarter of 2022. Will home prices ever come back down to earth?

NAR does expect more stability in home prices for 2023, and many other housing market experts predict the same. If you’re hoping to buy a house this year, the prices you see will depend largely on your local market — and the Federal Reserve’s rate moves. Here’s a deeper look.

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What’s driving housing prices?

Many factors affect home prices, but some weigh more heavily than others. These are some of the major variables most likely to drive housing prices:

 
  • Mortgage rates: The interest rate on a home loan can drastically sway the long-term price of ownership. As of early February, the average interest rate on a 30-year fixed rate loan was around 6.5 percent, much higher than rates have been over the last couple years. The higher monthly payments that result mean less purchasing power for buyers, which in turn means fewer people that can afford high home prices.
  • Available inventory: When there is high buyer demand but few options on the market to meet it, sellers can get away with asking higher prices. However, the pandemic’s raging seller’s market is starting to tilt back into balance in many areas. NAR data shows there were 90,000 more homes for sale in 2022 than in 2021. This is a small increase in the grand scheme of things, but an increase nevertheless — if the trend continues through 2023, prices may decrease as options increase.
  • Inflation: Inflation is finally starting to ease, which is obviously good news for consumers. However, the declining inflation rate is not driving down housing prices as much as it is gas prices and other costs. Homebuyers are still feeling the financial crunch.
  • Local market conditions: In the end, real estate is a very local industry, and prices can soar sky-high in one location while at the same time plummeting in another. The local job market, housing stock and overall cost of living all play large roles in each market’s housing prices.

 

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