Amid a housing market plagued by high mortgage rates and low inventory, home sales are ticking up and price declines are leveling off as buyers prepare for the spring sales season. But sellers have yet to join the fray — the number of homes for sale is the second-lowest on record — meaning stiff competition for well-priced homes, according to the latest Zillow market report. What mortgage rates do next will have a huge impact on the market’s momentum.

“Now as a buyer, you can slow down, have your inspection and make a strong, well-informed offer,” said Ryan Platzke, Realtor at Helgeson/Platzke Real Estate Group and member of Zillow’s Premier Agent program in Minneapolis. “And as a seller you are still in a very good position. You won’t see the 10 offers all cash, non-contingent, et cetera. But you will see one, maybe three offers, usually that first or second weekend, where you’ll be able to select which one to go forward with and comfortably make a decision.”

The typical home value was nearly flat from December to January, slipping just 0.1% and resting at $329,542, or 4.1% below the peak value set in July 2022. Despite the recent drop, it remains 6.2% higher than a year ago and 39% higher than before the pandemic.

“Sales fell for the 12th straight month, but the market is fragmenting more, giving potential home buyers leverage in certain regions and cities where prices are falling,” said Robert Frick, corporate economist at Navy Federal Credit Union. “Unfortunately, overall home prices are still increasing, though slowly, and mortgage rates ticked up in the last month while inventories remain low. So, for most potential home buyers, landing a home is still prohibitive, and we’re still waiting on lower mortgage rates and falling prices to reignite the market.”

Buyers returning, but potential sellers opt out

The number of people buying homes has ticked up since the fall and is looking like a normal pre-pandemic January. At a low point in November, newly pending listings were down 38% compared to one year earlier. In January, they were only down 20% from the previous year and were right in line with 2020.

Previously priced-out buyers were likely encouraged by mortgage rates that fell from a peak of 7.08% in November to 6.09% by February 2 before ticking back up. This dramatically improved shoppers’ ability to buy. A new mortgage for a typical home using a 5% down payment cost $2,310 in October; that fell to $2,100 by the end of January. But conditions are still far more challenging than they were before the pandemic — in January 2020, a monthly payment was $1,127.

But while buyers are returning to the market, homeowners are opting not to list their homes. The 230,000 new listings in January were by far the lowest total in Zillow records that began in 2018; 17% fewer than the then-record low of January 2022 and 30% lower than the 2018–2021 average of about 330,000.

“Home sales are bottoming out,” said Lawrence Yun, chief economist for the National Association of Realtors. “Prices vary depending on a market’s affordability, with lower-priced regions witnessing modest growth and more expensive regions experiencing declines.”

He added, “Inventory remains low, but buyers are beginning to have better negotiating power. Homes sitting on the market for more than 60 days can be purchased for around 10% less than the original list price.”

Total housing inventory registered at the end of January was 980,000 units, up 2.1% from December and 15.3% from one year ago (850,000). Unsold inventory sits at a 2.9-month supply at the current sales pace, unchanged from December but up from 1.6 months in January 2022.

“Home sales have slowed dramatically in the last three months as would-be buyers struggle with affordability and homeowners keep their homes off the market,” explained Holden Lewis, a mortgage expert for NerdWallet. “Higher mortgage rates are responsible for damping demand because they raise monthly payments and reduce affordability. But higher rates keep homes off the market, too, because owners don’t want to get stuck with outsize monthly payments on their next homes. Nationally, prices have fallen seven months in a row, and they likely would have fallen further if not for the restricted supply of homes for sale.”

The 825,000 homes on the market in January was the second-lowest total in several years, and about 450,000 fewer than were ever on the market in January 2020. This means competition for well-priced houses is stronger than before the pandemic, but don’t expect the widespread bidding wars of 2021 and early 2022.

It took a median of 31 days for a home to sell in January, indicating that buyer competition for attractive listings is livelier than pre-pandemic norms (more than 40 days to pending), but not as furious as in 2022 (nine days to pending) or 2021 (17 days to pending).

Will sellers return? If they do, what mortgage rates will buyers be facing?

In the first two weeks of February, mortgage rates shot up by as much as 0.75 of a percentage point, proving that no one can count on a consistent downward trajectory for rates this year. Continued rate hikes would stunt supply as well as demand. Homeowners with very low mortgage rates will be reluctant to sell and have to buy another home with a much higher rate. Meanwhile, buyers are already straining their budgets to get into a mortgage. Sellers waiting for peak demand to try to get the best price for their listing may find few buyers able to afford it.

“The risk for sellers waiting till April or May to list is that no one knows what mortgage rates will do in the meantime,” said Zillow senior economist Jeff Tucker. “Buyers may return to hibernation if last month’s mortgage-rate thaw turned out to be a false spring.”

Zillow senior economist Nicole Bachaud added: “Fluctuating demand caused by volatile mortgage rates and a slow trickle of new listings coming onto the market combined to bring another month of dismal home sales in January — now declining for 12 straight months and at its lowest level since 2010. We saw mortgage rates taking a breather in the beginning of the year, leading some buyers who were on the edge of affordability back into the market to take advantage of the brief dip in rates, which could possibly boost sales in February at the expense of a slight increase in home prices.”

Bachaud added, “But as rates are back up in the first half of February, demand will likely take another hit and push the market back into a slower pace. And with new listings continuing to lag historical trends, the total inventory pool is drying up and leaving buyers who can afford to shop in this market with few options. Although inventory for existing home sales is lacking, the backlog of new construction homes from the permit boom during the pandemic should add some much-needed new inventory to help keep the market moving this spring. And with many builders offering incentives, buyers might find more opportunities in the new construction market.”