The story of the housing market over the past year or so has been how rising mortgage rates have eroded affordability and turned away potential homebuyers. However, higher rates have led to an even bigger problem: a growing shortage of homes for sale.

Homeowners have been reluctant to switch or downgrade their homes, or to relocate and give up their record low mortgage rates. That leaves buyers with nothing to buy.

"The housing market is moving fast," said Mark Zandi, chief economist at Moody's Analytics." This should be a weak summer."

"From a buyer's perspective, things couldn't be worse. Mortgage rates are high, home prices are high and there's no inventory," he said.

It's not all smooth sailing for sellers, either. While they remain in the driver's seat due to the worsening housing shortage, they can't get the high prices they were getting a year ago. Now, buyers simply can't offer as much as they should due to rising interest rates resulting in a significant increase in monthly mortgage payments.

In other words, if buyers can find a home that meets their needs, they can hardly afford to buy it. Homeowners who want to trade in their homes, reduce their prices or relocate are stuck. And sellers can no longer say what they're priced at. As a result, the housing market has stalled.

"This summer will be slow and steady," predicts Jonathan Miller, a national real estate appraiser." It's going to be a Goldilocks summer - not too strong and not too weak."

Problem No. 1: Not enough homes available for sale

The biggest challenge facing the summer housing market is that there simply aren't enough homes for sale.

According to Realtor.com®, the number of new homes on the market is down 25.7% from June 2022 and down 28.8% from June 2019. While there are technically more homes for sale than there were a year ago, this is because some properties just aren't selling.

These are fixer uppers, homes with odd configurations, homes lacking curb appeal, homes priced unrealistically high, and properties in undesirable locations. During the COVID-19 pandemic, when people were desperate, these homes were selling. But now, housing costs are so high that buyers are less willing to compromise on a home that may or may not have potential.

In a desirable area, any attractive, move-in ready home with a price tag will sell quickly.

"Homes are sitting longer. We just haven't seen as many homes circulating on the market this year," said Danielle Hale, chief economist at Realtor.com." As we move into late summer and early fall, we may see even fewer homes on the market."

Many of the homes for sale are new construction. Owners of existing homes have been reluctant to give up their low mortgage rates. As a result, they are staying put unless they have a compelling reason to move.

In April, about 29 percent of homes for sale were new construction, according to Freddie Mac's count of Census Bureau and National Association of Realtors data. That's the highest share of new construction since data began being collected in 1999.

"The challenge for homebuyers this summer is more about limited choice than affordability," said appraiser Miller." A very limited housing supply is a bigger roadblock."

Not surprisingly, the lack of homes for sale has led to fewer home sales.

In a typical year, there will be about 5.5 million existing homes for sale (not including new construction). A really good year might see 6 million sales. But this year's home sales are expected to be only about 4.2 million, according to Realtor.com's mid-year housing forecast.

If we see more homes for sale, there will absolutely be buyers who have been waiting," said Jessica Lautz, NAR's deputy chief economist.

Problem No. 2: Mortgage rates remain high

Higher mortgage rates have been the main culprit for the slowdown in the housing market.

The U.S. Federal Reserve didn't like the sharp rise in home prices during the pandemic. It began raising its own interest rates in an effort to curb inflation and cool the housing market. Mortgage rates followed a similar upward trajectory, causing monthly payments to increase.

The result: The typical mortgage payment in June was 91%* larger than in June 2019 and 9% larger than in June 2022, according to an analysis by Realtor.com.

These higher mortgage rates are putting a chill on the housing market. Many potential homebuyers are being priced out, making the American dream of homeownership nothing more than a dream for many potential first-time homebuyers. Moreover, interest rates are expected to remain high.

Economists expect mortgage rates to remain in the mid-to-high 6% range until the Federal Reserve cuts rates. And unfortunately for homebuyers, Fed officials have said they expect one or two more rate hikes this year.

"It's possible we could see mortgage rates go back up a little bit. [But] I don't think we're going to get back up above 7 percent," Hale said.

"Unfortunately, rates have stabilized at a much higher level," said Len Kiefer, deputy chief economist at Freddie Mac." Without some major shocks, I don't expect rates to fall too low."

Problem 3: Prices are falling - but not enough to jump-start the market

Home prices will likely continue to fall some this summer as buyers reach their financial limits.

In June, listing prices fell nationwide for the first time in years, dropping 0.9 percent from last June's record high. With mortgage rates still high, this was not enough to bring any meaningful relief to most homebuyers.

And these price declines are not widespread. Prices fell in the most expensive parts of the country, generally in the West, and in areas that boomed during the pandemic, such as the South. However, prices are still rising in cheaper Midwestern and Northeastern markets.

"Real estate is more local now than it was years ago," Hale said.

Exactly how much prices will fall depends on who is asked. realtor.com expects prices this year to be 0.6 percent lower than last year. Moody's Analytics' Zandi expects home prices to continue to fall, down 8 percent from last year's peak. Meanwhile, economist Lisa Sturtevant believes prices will stabilize.

"In many markets, we won't see prices rise," said Sturtevant, chief economist for Bright MLS, a mid-Atlantic multiple listing service.

However, the lack of homes for sale may keep the market competitive. Buyers who have their hearts set on a particular property may have to compete for it. They may have to offer more than the list price to win a bidding war.

NAR's Rouse said existing homes received about three offers each, with the "vast majority" going under contract within a month. (Existing homes do not include new construction).

"I wouldn't be surprised to see a modest number of homes continue to be purchased and sold this summer," says appraiser Miller." The overriding theme for the summer is cautious optimism."

*The calculation uses the national median listing price for homes in June 2023, June 2022 and June 2019, as well as mortgage rates offered by Freddie Mac for 30-year fixed-rate loans in the third week of June for each of those years. It assumes a 20 percent down payment by the buyer and excludes property taxes, insurance premiums and homeowners association fees.