May 2022 signaled the beginning salvo in the Fed’s war against rampaging inflation. As rates nearly doubled in mere months, we exited mortgage nirvana, real estate sales slammed to a halt and we entered a new era of uncertainty.
Sellers, realizing they would lose sub-3 percent to 4 percent mortgages if they moved, decided en masse to sit on their hands and wait.
Conversely, buyers, faced with the prospects of dramatically higher mortgage payments, pulled out of the market in hordes, hoping to see a return to lower rates in the future. Those buyers who decided to buy anyway discovered that the significant reduction in inventory was forcing prices even higher, further exacerbating the situation.
Consequently, the remainder of 2022 through to the present has seen a situation that in no way resembles the market of 2019 through 2021. It had been hoped that by 2026 things would change; however, those hopes are so far unrealized.
Here are the key factors continuing to produce strong headwinds in the current market.
1. Mortgage rates remain the primary driver
Seller concerns about replacing their current 2 percent to 4 percent mortgages with those at higher numbers continue to limit inventory. The situation is further compounded as those who might be motivated to relocate are concerned that they would not be able to find suitable replacements.
Buyers, on the other hand, encouraged as rates momentarily dipped below 6 percent, have seen rates pushed higher in the past few weeks by the ongoing military activity in the Middle East, resulting in increasing oil prices along with a subsequent rise in inflation.
The stock market has responded negatively, further dampening the hopes of those who were planning to use stock options or investment portfolios to fund their down payments.
2. Home prices are leveling out as inventory increases
Although Realtor.com’s February market report shows an increase in inventory, supply is still below 2020 levels and is not enough to cause any significant easing in home prices. This is resulting in fewer multiple offer scenarios, and in many markets, price reductions are becoming more frequent, along with an increase in expired listings.
Sellers hoping to sell at pre-2022 levels are being forced to deal with the new realities.
3. Buyers are seeing increased opportunity
Some buyers, hoping rates would have dropped by now, are embracing the new reality and heading back into the market, causing a 1.7 percent increase in sales in February. While increasing inventory is providing more opportunity, yesteryear’s rabid disregard for pricing has all but disappeared as buyers are realizing they have more negotiating power than before.
Negotiation has reentered the market, along with requests for repairs, credits for closing costs and more. Additionally, data from the National Association of Realtors reveals that the number of first-time buyers is increasing. Historically hovering around 40 percent, the number dipped to 21 percent during 2025, but has now rebounded to +-34 percent so far in 2026.
4. Move-up buyers are beginning to reemerge
As inventory rises, more sellers are entertaining the idea of moving up or down. Those moving up are dealing with the fact of the higher mortgage rates, while many moving down are hoping to use the cash from the sale of their existing home to provide a mortgage-free future.
5. Capital gains taxes are becoming a major factor
I recently talked to a homeowner who purchased their modest 4-bedroom home for $60,000 a few decades ago. Values in their neighborhood have soared over the years, largely due to the highly desirable local school scores. As a result, the current market value is approximately $2.5 million. They have made almost no improvements to their home and, even after claiming their $500,000 tax deduction, would be facing a capital gains liability on approximately $1.8 million.
The Rolling Stone’s lyrics, “Wild horses couldn’t drag me away,” come to mind. It is time for the Feds to reexamine the exemption limits.
6. New construction is cautiously proceeding
While many states have been loudly proclaiming the need for new housing, they have, in many cases, done little to ameliorate ridiculously high development and building fees. This, coupled with rampantly increasing costs of land, construction materials and labor, has pushed new construction prices into an affordability crisis.
Recent tariffs are not helping. As a result, construction has been roughly flat over the past year. Builders, needing to sell their inventory, are pivoting to multifamily properties and more affordable, smaller single-family homes. They have also ramped up the use of incentives to get buyers into their model homes. As a result, the NAHB Builder Sentiment Index has dropped to 36, well into negative territory.
7. Escalating ownership costs
Not only have material and labor costs skyrocketed, but state-imposed directives such as California’s CA E3 Balcony Inspection Law and Florida’s HB 913 have pushed many HOAs to the brink of disaster. Mandatory inspections coupled with required compliance costs have resulted in substantial increases in HOA fees and, in many cases, large assessments to owners.
During the evaluation period, lenders typically withhold funding, thus limiting condo salability. Condos have previously been the entry point for first-time buyers who cannot afford single-family homes, but soaring HOA fees and the inability to secure mortgages have almost shuttered condo markets in key areas across the country. SFR owners are also seeing dramatically increased ownership costs.
8. Bottom line: Affordability
Current home prices, especially in the more affluent urban areas, have become decoupled from median incomes. Additionally, especially in states with natural disaster potential, rising insurance rates are adding to the crisis as many major insurers have pulled out of key regions, leaving state-run insurance programs and/or more expensive alternatives.
California, recognizing the issue, added an insurance contingency to its purchase agreement forms. It is one thing to buy a home, but the rising costs of living in that home are causing many potential buyers to hit the pause button.
It is a mixed market for sure. While we had hoped to be out of the woods by now, by and large, we need to take a deep breath and put that sentiment on hold.
Carl Medford is the CEO of The Medford Team.
