Is the home buying market improving?

Ever since Covid, buying a home has been a challenge, especially for first-time buyers.  Buyers have been hit by a triple-whammy. Home prices surged, homes for sale were limited, and interest rates on mortgage loans jumped.  Each of these factors made homes less affordable.  As a result, the percentage of households owning a home declined from 2020 to 2025.

But there’s been some good news recently. The percentage of households owning a home has been rising because home prices, the availability of homes for sale, and mortgage interest rates have all been moving in a favorable direction for buyers.  This leaves us with two important questions – why have the trends turned favorable, and will they continue?

Before answering these questions, let’s first examine why homebuying became so expensive.  It began with Covid, where shutdowns and delays to workers returning to work caused home construction fall by double-digit rates.  Yet at the same time, the federal government was doing all it could to keep the economy afloat. A total of $7 trillion was pushed into the economy through numerous programs to assist both households and businesses.  At the same time, the Federal Reserve used its influence to lower the 30-year fixed mortgage interest rate to an unprecedented level of 2.8%. By comparison, today’s rate is 6.2%. 

The result was homebuyers had cash for downpayments and could obtain very low cost loans. Yet with construction not fully recovered and construction materials more expensive, home prices soared, with the average price jumping over 70%.

It’s no surprise that an index of home affordability specifically for North Carolina from the Kenan Institute showed a plunge in home affordability in the years immediately after Covid.  But affordability fell even more once the Federal Reserve (the “Fed”) turned its attention to fighting inflation.  The Fed’s “easy money policy” after Covid sparked a take-off in inflation to an annual double-digit rate by 2022.   This caused the Fed to “tighten” its policy, meaning it pulled money out of the economy and supported higher interest rates.  By 2023 the average 30-year fixed mortgage rate surpassed 7.7%, the highest this century.

However, as the article’s title asks, has there been any improvement for homebuyers, meaning gains in affordability?  Fortunately, the answer is “yes.”  For example, the index of affordability specifically for North Carolina has improved 14% from 2023 to 2025.

To understand why buying a home is showing some improvements in affordability, let’s look at the fundamental drivers of affordability: the supply of homes for sale, the average price of homes for sale, the mortgage interest rate, and buyers’ income.

North Carolina continues to have the second strongest home construction sector in the Southeast, second only to Florida.  But while this is signigicant, the recent game-changer impacting supply is more existing homeowners putting their homes on the market.  This is likely because those owners who want to sell and purchase another home have been motivated by lower mortgage interest rates.

Mortgage interest rates are clearly on a downward trend.  Today the interest rate on a 30 year fixed rate mortgage is hovering around 6%, almost two percentage points lower than the rate in 2023. While the mortgage rate won’t reach the 2% and 3% levels immediately after the pandemic, a 6% rate is in the range of typical mortgage rates over the past fifty years.

There’s also good news on home prices. Several sources show the average price of homes for sale trending down over the last year.

But perhaps the best news for potential homebuyers is the improvement in their income. When comparing household earnings over time, it is important to adjust those earnings for increases in prices, or inflation for short.  Even if a household earns more, those extra earnings can be wiped out by higher prices.

In two of the last three years, this is exactly what happened to the average household.  Their income gains were more than countered by price increases, meaning the standard of living of the average household fell.  But in the last year, that is , comparing 2025 to 2024, average household earnings rose more than prices.

Therefore, with more homes for sale, lower prices, more modest interest rates, and a better income situation for households, purchasing a home in North Carolina is now more affordable in the past. As long as the inflation rate continues to moderate, the economy grows, earnings rise, and no long-lasting negative shocks to the economy occur, buying a home should be within the reach of more people. If you have been out of the housing market and want to jump in, should you? You decide!

Walden is a William Neal Reynolds Distinguished Professor Emeritus at North Carolina State University.