Real Estate prices and sales have taken a pause; which direction will they go next?

There is much ado in the media these days about real estate sales “slowing” and interest rates increasing, including the topic of the 5% mortgage rate “barrier” – what should we make of this?

The reality is, real estate prices are still going up; although, at a slower rate than recent years. The real estate market has actually been behaving more normally than in the past, with offers at or below the asking price. In fact, 25% of sellers have actually reduced their asking price over the last month, according to Redfin, the most in eight years.

What I think this points to is a “pause” in the real estate market, and that buyers and sellers are taking a break and resting a bit before the next surge. Several factors influence my thinking in this way: 1) the current existing home inventory is (at 4.4 months’ supply) still below the “equilibrium” value of 6-7 months supply, 2) new housing starts are at 1.2 million, well below the long-term average of 1.4 million, and 3) as 30-year fixed interest rates approach 5% (currently between 4.74-4.85%), more sellers will think twice before deciding to move.

I believe we are in the calm before the storm. Interest rates will go higher through next year. At some point the economy will falter, and the ensuing recession will force the Federal Reserve to reduce interest rates. With lower interest rates, more consumers will become interested in purchasing homes again. And if a recession occurs, the stock market will fall (if it doesn’t precede the recession), which will cause investors to shift their investments from stocks to real estate. All this will drive real estate prices higher.