Real estate prices have just fallen to their lowest level in two years

The real estate market could finally change in favor of buyers.

A good sign for homebuyers is the increase in the share of available listings that have been priced lower, to 18.9 percent in July, up 3.4 percent from the same period last year and the highest level in two years, according to a new report from Realtor.com.

Price reductions are atypical in July, usually the peak period for home sales, but this year is different as sellers try to lure back lukewarm buyers faced with high costs and high interest rates.

“First, interest rates are higher than expected, which means there is less buyer activity,” said Ralph McLaughlin, senior economist at Realtor.com. “Second, the prospect of lower mortgage rates in the fall may have caused some buyers to wait. This combination has caused sellers to lower their prices to attract more buyers.”

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The report also showed that the median home price fell to $439,950 last month, compared to $445,000 in June.

Houses in Centreville, Maryland, on April 4, 2023. (Photographer: Nathan Howard/Bloomberg via Getty Images / Getty Images)

In as many as 47 of the 50 metropolitan areas monitored by Realtor.com, the proportion of price reductions has increased compared to the previous year.

The cities with the largest increases in the share of price reductions were Tampa (Florida) with 9.7%, Charlotte (North Carolina) with 9.5% and Phoenix with 9.4%.

“These are places where sellers have done well with rising prices in recent years, but now that the impact of higher interest rates is being fully felt, sellers need to bring their price expectations back down to earth,” McLaughlin said.

There are several causes behind the affordability crisis.

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Years of under-development led to a housing shortage in the country, a problem later exacerbated by rapid increases in mortgage rates and expensive building materials.

Houses in Hercules, California, on August 16, 2023. (David Paul Morris/Bloomberg via Getty Images / Getty Images)

Higher mortgage rates over the past three years have also created a “golden handcuff” effect in the real estate market. Sellers who secured a record-low mortgage rate of 3% or less at the start of the pandemic have been hesitant to sell, further limiting supply and leaving eager potential buyers with few options.

Economists expect mortgage rates to remain high for most of 2024 and only begin to decline when the The US Federal Reserve begins to cut interest rates. Even then, interest rates are unlikely to return to the lows seen during the pandemic.

Mortgage buyer Freddie Mac said on Thursday that the average interest rate for a 30-year loan fell to 6.47%, the lowest level in over a year. While that’s down from the fall peak of 7.79%, it’s still significantly higher than pandemic-era lows of just 3%.

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According to a survey by Zillow, most homeowners are almost twice as willing to sell their home if their mortgage rate is 5% or more. Currently, about 80% of mortgage holders have rates below 5%.