After five consecutive months of year-over-year declines - the longest-lasting decline in 11 years - U.S. home prices rose in July.

This surprisingly rapid recovery suggests that the residential real estate downturn is shorter and shallower than many housing economists expected after mortgage rates spiked last year.

Scarcity is a major reason. High interest rates have prompted homeowners to hold off rather than buy new homes and take on more expensive mortgages, resulting in an unusually low inventory of homes for sale.

With mortgage rates recently hitting a two-decade high, many potential homebuyers have given up on their search. However, homes listed for sale typically still receive multiple offers, which pushes up the final selling price.

As a result, the overall volume of transactions in the market has plummeted. Currently, sales of second homes are down about 36% from January 2022 levels. However, with the exception of a few problem spots, prices have remained generally firm.

The national median sales price for existing homes rose 1.9% to $406,700 in July from a year earlier, according to the National Association of Realtors. In August, home prices hit record highs in 30 of the 50 largest markets, according to Black Knight, a mortgage data and technology company.

With mortgage rates hovering above 7 per cent and the housing market entering what is usually a slower autumn and winter season, sales could continue to shrink in the coming months. But even if that happens, economists say, house prices are unlikely to fall sharply because there are still not enough homes for sale to meet demand.

Diane Swonk, chief economist at KPMG, says: "Even in markets where demand has been hit by rising interest rates, there's not enough supply." Without a massive increase in supply, it will be difficult for house prices to fall.

Swonk was one of those who didn't see it coming.2022 At the end of the year, she had predicted a 20 percent drop in home prices nationwide this year. Now, she says, prices could end the year slightly higher than last year.

Other economists have also ripped into bearish forecasts. pulsenomics surveyed more than 100 economists and housing analysts in march, and they projected a year-on-year decline in home prices of about 2 per cent by the end of 2023. when surveyed again in august, the group predicted that home prices would be up 3.3 per cent this year. the survey also predicted that home prices would be down by about 2 per cent by the end of 2023, compared with a year earlier.

Stubbornly high prices could push homeownership affordability near its worst level in decades. in June, the NAR housing affordability index, which takes into account factors such as household income, mortgage rates and the sales price of existing single-family homes, fell to its lowest level in nearly 38 years. the NAR's housing affordability index, which takes into account factors such as household income, mortgage rates and the sales price of existing single-family homes, has been in the process of being revised to reflect this.

The total value of U.S. homes rose to a record high of $46.8 trillion during the month, according to real estate brokerage Redfin.

The number of new homes listed for sale was so small that bidding wars are still breaking out. According to the National Association of Realtors (NAR), homes sold in July received an average of three offers, even as overall sales activity shrank. Active listings in August were down 7.9% from a year ago and 46% from August 2019, according to Realtor.com. (The Wall Street Journal's parent company, News Corp, runs Realtor.com.)

In many markets, "If you're looking at a home on Tuesday, you're likely going to have to make an offer at a higher price by Thursday morning, says Matthew Ricci, a home loan specialist at Churchill Mortgage in Cranston, R.I. "The overall theme in most of these areas continues to be limited inventory."

Katie Weber and Chris Weber found that out the hard way when they moved from Michigan to Connecticut with their four children in the spring. They found a five-bedroom house in Coventry, Connecticut, listed for about $700,000 USD. They beat out the competition for $752,000 and agreed to delay the closing to accommodate the seller's schedule.

The pressure was too much, Katie Webb said.

Her parents, George and Ann Media, also moved to Connecticut around the same time, and lost seven opportunities to buy a home before their eighth accepted offer.

"We had to overpay." George Midea said. We lost the house by $100,000. It was absolutely insane.

Financial conditions help explain the lack of inventory. Mortgage standards have tightened since the 2008-09 financial crisis, and homeowners can largely afford their monthly payments. Most also have equity in their homes due to rising prices.

Most homeowners have also locked in lower mortgage rates, and the gap between what they're paying now and what they'll pay when they trade up is so large that many can't justify the move.

The average principal and interest payment for homeowners with a mortgage was $1,355 in June, Black Knight said. By comparison, the median payment for homebuyers with 30-year fixed-rate loans was $2,306 in July.

Federal Reserve Chairman Jerome Powell noted in August that the strong performance of the housing market suggests the slowdown may not be as large as expected.

The housing sector is showing signs of picking up after a sharp slowdown over the past 18 months, Powell said in a speech in Jackson Hole, Wyoming.

The biggest price declines have been in already pricey Western markets such as Seattle and in cities such as Austin, Texas, that grew rapidly during the pandemic.

Year-over-year home prices are still falling in 14 of the nation's 50 largest markets, according to Black Knight, with Austin bearing the brunt of the decline, with prices falling 11.9 percent year-over-year in August. But nationally, Black Knight said, home prices rose 2.3 percent year-over-year in August.

Even in Seattle, "home prices haven't fallen as much as people expected," said Junior Torres, a real estate agent. Seattle home prices soared 314 percent from their peak in January 2000 to May 2022 and slipped 10.5 percent between May 2022 and June 2023, according to S&P Dow Jones Indices.

Torres said the market is less competitive than it was in 2021, when interest rates were low. But he said buyers still often have to compete with one or two other bidders and need to pay more than the list price to win." He said, "I probably have close to 20 buyers on standby." They haven't found anything yet.