According to a new report from Realtor.com®, which found that listing prices rose by just 2.5% in April compared to a year ago. This is the slowest annual price increase since April 2020, when the COVID-19 quarantine forced the real estate market to a standstill.

Once the market opened up again, the pandemic unleashed a steep and unprecedented rise in house prices, culminating in a record high of $449,000 last June. But the latest figures suggest that this surging sellers' market may have finally peaked and will soon subside.

"At this slower pace, listing prices are likely to decline sometime in May relative to the previous year," predicts Danielle Hale, chief economist at Realtor.com, in her latest analysis of housing trends." For buyers, the slowdown and possible drop in listing prices could be a welcome reprieve."

Why home prices and mortgage rates may have peaked

"Interest rates should decline moderately during 2023 as inflation declines," Freddie Mac chief economist Sam Khater recently predicted.

This double dose of hope may be just what homebuyers need to hear now to look at some open houses and move forward with courage.

"In the coming months, we may see an improvement in affordability compared to the previous year," Hale continued. However, "it is important to note that affordability is expected to continue to present a headwind for many homebuyers this year."

Indeed, the monthly financing costs for 80 per cent of a typical home are 19 per cent higher than a year ago, which equates to an extra $340 per month.

Until those costs come down, the housing market may remain largely locked in a staring contest, with homebuyers waiting for prices to fall and sellers waiting for more buyers to come off the sidelines.

"Some buyers and sellers may want to wait," said Lawrence Yun, chief economist at the National Association of Realtors.

However, there are some risks associated with waiting.

"Home prices may be inflated when interest rates are low, rather than buyers being able to negotiate a better price now and then refinance if rates fall," Yun explains." With such a shortage of inventory, it's not clear that a home on the market now that fits that price will be available later."

Why lower home prices and mortgage rates may not be enough

While home prices may soon be lower, homebuyers may face other problems. First, there just aren't enough homes for sale.

While there were 48.3 per cent more listings this April than a year ago, inventory is "still well below pre-pandemic levels," Hale notes." This means that on a typical day in April, there are still fewer homes available for purchase than there were a few years ago."

In addition, inventory growth slowed for the second month in a row in April, with 21.3 per cent fewer properties added during the month.

Many sellers held off listing their homes as they felt 'locked in' by the current low mortgage rates.

In addition, the prospect of selling seems less enticing as the red-hot seller's market of the past few years is waning.

In April, 12.2 per cent of homes on the market dropped in price. That's below the 2017-19 average, Hale noted, suggesting that "sellers may be setting their initial asking prices more in line with buyers' expectations than was typical prior to the pandemic."

Homes are also languishing on the market, with a median of 49 days in April. This is 17 days longer than last year, but still shorter than before the pandemic.

Nonetheless, the outlook is bright for many sellers, especially if they have owned their homes for some time.

"Sellers who have built up equity in their homes are in a better position to find their next home in a cooling market," Hale said. But they "may need to lower their expectations of selling their current home".

Meanwhile, homebuyers are shopping around for affordable homes.

Many have targeted lower-cost metros in the middle of the country, although this in turn has caused prices in those areas to start rising. Compared to a year ago, Memphis, Tennessee (31.7%), Milwaukee (21.7%) and Kansas City, Missouri (21.1%) have seen the biggest increases in home prices.

Conversely, the areas that attracted the most newcomers during the pandemic, and where prices boomed, have now reversed many of these patterns. The biggest price declines were in Austin, Texas, where prices were down 8.8% year-on-year; Las Vegas, down 7.1%; and Houston, down 4.6%.

Cloud believes that many of the long-distance relocations triggered by the start of remote work may end in 2020, but work arrangements will still play a role in determining where people live.

"Regional long-distance relocation," he says, "will be limited - for example, moving from San Francisco to Cincinnati, a very affordable market." But going to the next county and outer suburbs will be popular. Homes in the outer ring are more affordable, and those who can choose to work from home occasionally will not have to commute every day."