Wharton’s Benjamin Keys talks with Wharton Business Daily on SiriusXM about the hurdles home buyers face in the current market.

Winter is coming, and the forecast for the housing market is bleak.

Wharton real estate professor Benjamin Keys said he doesn’t expect to see a dramatic decline in home prices over the next six months, which is typically a downtime for real estate transactions. Although some homebuyers have exited the market, discouraged by mortgage interest rates that rose above 6% last week, the supply remains low against robust demand across the U.S.

“There’s a strong seasonality to the housing market, but it looks like right now the housing market might be packing it in for a long winter’s nap,” he said to Wharton Business Daily on SiriusXM. “You have a lot fewer homes that are being listed for sale, and what that means is prices can stay quite high even when there is a reduction in demand because there just aren’t a lot of houses that are out there on the market.”

Keys said there is a “tension” between rising interest rates, which can add hundreds of dollars to a monthly payment, and rising rents, which create budget instability for tenants. In June, Redfin reported that the median monthly rent in the U.S. has increased 15% year over year, now surpassing $2,000. Locking in a fixed mortgage payment, albeit a higher one, still holds a lot of appeal for renters who have grown weary of the unknown.

“There’s a strong seasonality to the housing market, but it looks like right now the housing market might be packing it in for a long winter’s nap.”— Benjamin Keys

“Young families are between a rock and a hard place,” he said. “This is a really tough time for young families and young households looking to be first-time home buyers.”

It’s not just young families who are influencing the market; baby boomers who are retiring and millennials who are aging into their peak homebuying years are also contributing to demand, Keys said. Meanwhile, there is a shortage of about 4 million housing units in the U.S., according to Freddie Mac and others.

Keys said there’s tension, too, in the construction industry and no easy answers about whether developers should focus on building more single-family or multi-family dwellings to ease demand. But one thing is clear: Owning a home is no longer the sure path to building personal wealth that it was for previous generations of Americans.

“I think there’s a sense in which that path may not be open to everyone in the same way going forward because house prices are just so high,” he said.

“Young families are between a rock and a hard place.”— Benjamin Keys

The Pandemic Effect

In general, real estate prices have been rising steadily since the housing market recovered from the Great Recession. But they spiked during the COVID-19 pandemic, along with demand that was driven largely by the middle class. As many people shifted to remote work and school, they craved better digs and more space. They also stopped going out for dinner or taking vacations, so they saved up plenty of cash for a bigger down payment.

Those higher prices have continued to hold stubbornly steady against creeping interest rates and nagging inflation.

“The first and foremost effect of rising interest rates is not necessarily a price decline,” Keys said. “It’s a decline in activity. It’s a decline in transactions.”

There are some financial considerations for Americans who are trying to reconcile the tension of rising rates versus rising rents, Key said. While the professor strongly advises would-be buyers to borrow only within their means, the option to refinance when interest rates fall again is worth factoring into their decision.

“At the end of the day, that option might still be a better one than watching your rent go up 10% each year,” Keys said.