Home Price Gains Are Slowing, but Here's Why Buyers Shouldn't Celebrate Just Yet

It's good news, but only to a point.

If you or someone you know has struggled to buy a home over the past year or so, you're definitely not alone. Home prices have been elevated for quite some time on a national scale, and that alone has been putting a strain on buyers.

Meanwhile, over the past year, mortgage rates have risen sharply. And the combination of higher borrowing costs and expensive home prices has forced many buyers to sit out the market until conditions improve.

Now, the good news is that home price gains have been slowing in recent months. In January, home price gains came to 3.8% on an annual basis, as per the S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index. Compared to December's 5.6% gain, that's an improvement -- for buyers, at least.

But a cooldown in home price gains isn't necessarily something for buyers to celebrate. That's because many buyers will still inevitably experience affordability challenges in today's housing market.

Slower gains doesn't mean homes have gotten cheap

It may be that sellers are no longer able to command the same premiums for their homes they could've fetched a year ago. But it's important to understand that a 3.8% home price gain is still a gain nonetheless. And while 3.8% is not a staggering number in its own right, given where mortgage rates are at today, it's easy to see why a lot of people are apt to continue to struggle to afford a home purchase.

On the bright side, higher mortgage rates have cooled buyer demand and led to fewer bidding wars, which have the potential to drive home prices way up. Sellers may still be getting multiple offers on their homes, but to a lesser degree than they were in 2021 or early 2022. And sellers may be more open to making concessions these days than a year ago, such as making repairs or offering discounts in lieu of requested repairs.

But still, today's housing market is by no means buyer-friendly, especially in areas of the country where inventory is notably sluggish. And until real estate inventory picks up on a national scale, we're likely to see a lot of would-be buyers stuck in a holding pattern.

Can you afford to buy a home today?

As a general rule, your monthly housing costs, including your mortgage payments, property taxes, homeowners insurance premiums, and HOA dues, if applicable, should not exceed 30% of your take-home pay. If you can find a home that allows you to stick to that limit, then you may be in a good position to purchase a home this year. If not, waiting longer may be inevitable -- and it might spare you a world of financial regret.

READ MORE: 10 Expenses of Home Ownership You Need to Know

The good news is that home prices will likely continue to cool this year. If mortgage rates drop modestly as that happens, more buyers may have a chance at becoming homeowners. But we don't know which direction mortgage rates will go. And that, ultimately, is one of the biggest wild cards buyers will have to grapple with in 2023.