May 2022 marked the beginning of a salvo in the Fed’s fight against runaway inflation. With interest rates nearly doubling in just a few months, we have emerged from mortgage heaven, property sales have ground to a halt and we have entered a new era of uncertainty.
Realizing that they would lose their mortgage of less than 3% to 4% if they moved, the sellers all decided to sit back and wait.
Conversely, buyers faced with the prospect of significantly higher mortgage payments exited the market in droves, hoping for a return to lower interest rates in the future. Buyers who decided to buy anyway found that the drastic reduction in inventory pushed prices even higher, making the situation even worse.
As a result, the remainder of 2022 to now is seeing a situation that bears no resemblance to the 2019-2021 market. It was hoped that by 2026 the situation would change. But that hope has so far not come true.
The key factors that continue to create strong headwinds in the current market are:
1. Mortgage rates remain a key factor
Seller concerns about replacing current 2% to 4% mortgages with higher value mortgages continue to limit inventory. The situation is further exacerbated by people who want to emigrate and fear that they will not be able to find a suitable replacement.
Meanwhile, buyers were encouraged by interest rates briefly falling below 6%, but ongoing military activity in the Middle East has pushed interest rates higher in the past few weeks, resulting in higher oil prices and a corresponding rise in inflation.
The stock market reaction was negative, further dampening the hopes of those who had planned to use stock options or investment portfolios to fund their down payments.
2. Housing prices are trending flat as inventory increases
Although Realtor.com’s February market report shows an increase in inventory, supply is still below 2020 levels and not enough to cause a significant easing in home prices. As a result, multiple offer scenarios are decreasing and price reductions are becoming more frequent with an increase in expired listings in many markets.
Sellers hoping to sell at pre-2022 levels are having to adapt to a new reality.
3. Buyers are sensing increased opportunity
Sales rose 1.7% in February as some buyers, hoping interest rates would be lower by now, are accepting the new reality and returning to the market. Increased inventory is creating more opportunities, but last year’s frenzied disdain for pricing has all but disappeared as buyers begin to realize they have more bargaining power than before.
Negotiations are back in the market, along with repair requests and credits for closing costs. Additionally, data from the National Association of Realtors reveals that the number of first-time buyers is increasing. Until now, it has been hovering around 40%, but in 2025 it has fallen to 21%, but as of 2026 it has recovered to +-34%.
4. Advance buyers are starting to emerge again
As inventory increases, more sellers are considering raising or lowering prices. While upward movers are dealing with the reality of rising mortgage rates, many downward movers hope to use the cash they receive from selling their existing home to provide a mortgage-free lifestyle in the future.
5. Capital gains tax is becoming a major factor
I recently spoke with a homeowner who bought a modest four-bedroom home for $60,000 decades ago. Neighborhood values have increased over the years, primarily due to the highly desirable performance of local schools. As a result, the current market value is approximately $2.5 million. They have made few improvements to their home and even after claiming a $500,000 tax credit, they will still face a capital gains liability of about $1.8 million.
The lyrics from Rolling Stone come to mind: “The wild horses couldn’t separate me.” The time has come for the Fed to reconsider its forgiveness limits.
6. New construction work is progressing carefully
Although many states are vocal about the need for new housing, they often do little to improve the prohibitively high development and construction costs. This, combined with rising costs for land, construction materials, and labor, has created an affordability crisis for new construction.
Recent tariffs don’t help. As a result, construction work has remained roughly flat over the past year. Builders who need to sell inventory are turning to multifamily housing and smaller, single-family homes that are more affordable. The company is also stepping up its use of incentives to attract buyers to model homes. As a result, the NAHB Builder Sentiment Index fell to 36, significantly moving into negative territory.
7. Increasing cost of ownership
In addition to rising material and labor costs, state-imposed mandates such as California’s CA E3 Balcony Inspection Law and Florida’s HB 913 are pushing many HOAs to the brink of disaster. The combination of mandatory inspections and required compliance fees has significantly increased HOA fees and often resulted in hefty assessments for owners.
During the appraisal period, lenders typically withhold funding, which limits the condo’s ability to sell. Condos have traditionally been an entry point for first-time buyers who can’t afford a single-family home, but rising HOA fees and the inability to secure a mortgage have all but shut down the condo market in major regions across the country. SFR owners also face significantly increased costs of ownership.
8. Conclusion: Affordable
Current home prices are decoupled from median incomes, especially in wealthy urban areas. Additionally, rising premiums are adding to the crisis, especially in states with a high potential for natural disasters, as many large insurance companies exit key regions, leaving behind state-run insurance programs and more expensive alternatives.
California recognized this problem and added an insurance addendum to purchase contracts. Buying a home is one thing, but the rising cost of living in that home is causing many potential buyers to hit the pause button.
It’s certainly a mixed market. For the most part, we wanted to be out of the woods already, but we have to take a deep breath and put those feelings on hold.
