In February, real estate economists at Zillow, the largest real estate website in the United States, made a bold prediction that U.S. home prices had already bottomed out and would continue to climb by 0.5 per cent over the next next 12 months.

Over the next few months, U.S. home prices tracked by the Zillow Home Value Index (Zillow Home Value Index) not only began to climb again, but also hit an all-time high.

This rise was driven by the "tailwind" of tight housing levels. Tightness levels have proved strong enough to offset the impact of mortgage rates.

As U.S. home prices rebound, Zillow continues to raise its home price forecast index. The company's latest release forecasts that U.S. home prices will rise 6.5 percent between July 2023 and July 2024, up from last month's forecast of 6.3 percent. For reference, U.S. home prices tracked by Case-Shiller have grown an average of 5.5 per cent a year since 1975.

Zillow property economists said, "The limited number of homes for sale will continue to push up home prices, even though mortgage rates remain high. Slightly more than half as many homes were listed for sale in July compared to the same month in 2019, and there were 29 per cent fewer new listings on the market in July compared to the typical pre-epidemic period."

"This shortage has intensified the competition for homes for sale. homes under contract (or 'pending') closed within 12 days on average in July, a week and a half faster than the typical same period in 2018 and 2019."

While Zillow's housing economists expect national home prices to rise by 6.5 per cent over the next 12 months, their forecasting model shows that 120 of the 400 largest housing markets in the U.S. will be on track to rise by 7.0 per cent or more over the next 12 months.

The 120 housing markets predicted to rise are spread across the country in the West (e.g., Santa Maria, California), South (Tampa), Midwest (Indianapolis) and Northeast (Scranton, Pennsylvania).

While Zillow believes U.S. home prices have bottomed out - and economists at CoreLogic and the AEI Housing Centre also believe this - different firms continue to hold different views. Moody's Analytics and Morgan Stanley, for example, believe that U.S. home prices could see further declines between now and the end of 2024 before bottoming out.

According to the latest data from Freddie Mac, mortgage rates reached 7 per cent, the highest level in 22 years, and home buyers will face rising costs. Some property experts have warned that rates could continue to rise to close to 8 per cent.

Mortgage rates in the US as at 30 August 2023 are as follows:

- 30-year fixed rate: 7.23 per cent

- 15-year fixed: 6.55 per cent

- 7-year ARM: 5.92 per cent

- 5-year ARM: 5.47 per cent

What does this mean for homebuyers? Even real estate professionals who have always been optimistic say buyers and sellers must adjust their internal expectations.

"I don't like to be all pessimistic, after all, this is my area of business," says Bess Freedman, CEO of national real estate firm Brown Harris Stevens, "and I still think real estate is the best long-term investment out there . But there's a change in perspective, and it's unrealistic for people to assume that just because inflation is starting to move in the right direction, that mortgage rates will also fall."

Despite recent reports that inflation is cooling, Freedman (Freedman) still believes that inflation is still too high and that an overheated economy is not good for the property market.

"The high level of interest rates we're seeing right now is having an impact on the real estate market," Freedman said, "Interest rates have doubled. Housing inventory is limited. Home prices remain high. These three factors have combined to create an inactive housing market."

And there are few signs that this will change significantly in the near term, as the Fed continues to focus on inflation, which could reintroduce the possibility of further interest rate increases.

"Are rates likely to rise further? Possibly. I don't see any clear signs of them falling. So people need to accept the current level of interest rates," Freedman added.

Fixed rates on 30-year mortgages have risen sharply over the past 31 months, from a low weekly average of 2.65 per cent in January 2021 to current levels, according to Freddie Mac.

This also means that for a homebuyer purchasing a median-priced home with a 20% down payment, the monthly payment has increased by more than $1,200. As a result, many people cannot afford the cost of purchasing a home.

Buyers who are still in the market for a home are finding that available listings have hit an all-time low.

Since mortgage rates were so low during the New Crown epidemic that people were buying or refinancing their loans at 2% or 3%, they have little incentive to sell and buy another home at 6%, 7% or even higher rates.

How did U.S. home prices arrive at such a situation?

Home prices have stayed high due to a lack of housing supply. In June of this year, the median U.S. home price hit its second-highest level on record at $410,200, just 0.9 per cent below the all-time high of $413,800 set the year before.

Fed minutes released this week showed that inflation remains a continuing concern if the economy and labour market don't cool off, meaning the possibility of raising interest rates again could be discussed at one of the three remaining meetings this year.

This week, the 10-year yield on U.S. Treasuries crossed the 4.2 per cent threshold, the highest level in more than a decade. Lawrence Yun, chief economist at the National Association of Realtors, said it was a tipping point.

"If it breaks through that level, then momentum, however irrational, could push it up to the 5 per cent level. That's bad news for mortgage rates, which could rise to 8 per cent accordingly," Yun added.

Based on the current average mortgage rate of 7.09 per cent, a buyer of a home with a median price of $410,200 would pay $2,203 a month in principal and interest, according to data calculated using the Freddie Mac tool. In January 2021, when the median home price is about $309,900 and interest rates are below 2.65 per cent, buyers will pay just $999 a month.

Fed officials raised interest rates to the highest level in 22 years. Although the Fed does not directly set the interest rates on borrowers' mortgages, its actions can have an impact on those rates.

Mortgage rates tend to follow the yield on the 10-year U.S. Treasury bond, and those yields interact with each other based on expectations of the Fed's actions, what the Fed actually does, and how investors react. When Treasury yields rise, so do mortgage rates.

Melissa Cohn, regional vice president of William Raveis Mortgage, said the market is pricing in the possibility of another rate hike, and there are quite a few risks in the economy right now. Banks are keeping an eye on those risks and therefore keeping rates higher.

"Banks are also protecting themselves and their bottom line. Unfortunately for home buyers, interest rates are likely to rise further and are expected to remain high. Inflation will only really fall if people spend less and unemployment is lower. As long as the employment situation remains strong, it will be difficult for inflation to keep falling. I don't think real relief will be possible until next year," Cohn (Cohn) added.

Jessica Lautz, deputy chief economist at the National Association of Realtors, said: "Rising mortgage rates are exacerbating the unaffordability of housing because prices are rising in this limited housing environment. Something has to change to bring rates down, and that change lies in the Fed's next decision."

The Fed is said to hold three more rate-setting meetings this year, in September, November and December.