Last January, there were clues. Even though the 2022 market started strong, Zillow economists cautioned against elevated inflation, which could eventually deplete housing demand. The 30-year year fixed mortgage rate at the time: just above 3.5%.

It’s useful to review how much the market has changed since then — and to remember that today’s conditions could look very different in 12 months. In our final 2022 market report, Zillow Senior Economist Nicole Bachaud explains whether affordability is finally improving, where home values are dropping and what to make of stalled listings.

Affordability is gradually improving
Key stat: Mortgage rates are down 75 basis points since their high in November.

“This is really good news to see any movement in the right direction in terms of affordability,” Bachaud says. “The ability for homeowners and buyers to unlock room in their budget to afford to buy a home is increasing as we’re seeing rates coming down.”

Compared to the last few years, it’s still significantly more expensive to purchase a home today, but every little bit helps buyers. That’s why mortgage applications have increased over the last six weeks while mortgage rates have decreased.

Takeaway: Expect rates to drop more in 2023, but nowhere near the sub-3% levels buyers saw in 2021. Bachaud believes they may settle somewhere between 5.5% and 6.5%.

Buyers are finally getting some relief out West. Key stat: In San Francisco, Phoenix, Los Angeles and San Diego, average home values have fallen more than 7% since their pandemic peaks.

Home values have decreased at large clips in major U.S. metros, especially out West. Relatedly, listings with price cuts are most common in states like Arizona, Colorado and Utah.

How home values changed since pandemic peaks

“That’s likely going to continue for the next several months, as those markets have just hit this affordability ceiling,” Bachaud says. “But even as prices and rates are coming down a bit, we still are nowhere near historic affordability levels, and that’s really challenging for potential home buyers.”

Takeaway: Sellers in these regions may need to adjust their expectations and pricing strategies to align with demand.

Stalled listings may prevent runaway price declines

Key stat: Active nationwide listings currently sit around 700k, higher than inventory at the end of 2020 (640k homes) and 2021 (470k homes), but still well below 2019 levels, when over 1 million places were on the market to end the year.

New listings typically decrease at the end of the year. However, the current inventory rate may be helping stabilize prices so sellers don’t see home values free-fall. It’s a unique byproduct of this cool market.

“Because we’re not going to see a big boost in inventory, we’re likely going to continue to see pressure on prices to stabilize and flatline more so than see a severe drop nationally,” Bachaud says.

Takeaway: Bachaud predicts this trend will persist for at least the next few months. But inventory could rebound in spring or summer if buyers accept 5%+ mortgage rates as the new normal.