For the first time since the start of the Covid-19 pandemic, U.S. home prices are showing signs of stabilizing.

For the four weeks ending June 23, only about 2/3 of homes sold for more than asking price, the lowest share since June of 2020. Annual home price growth slipped to 4.6% in May from 5.3% in April. That is the lowest growth rate in seven months.

Analysts say reversion to pre-pandemic norms is key to returning to a balanced housing market. Preliminary June data shows the typical home is selling for less than asking price. If that data persists, it could be a game-changer.

However, experts caution the current market landscape differs significantly from previous years, with affordability the most pressing issue.

At the root of low inventory is the mortgage rate “lock-in effect” – stemming from large numbers of homeowners with ultra-low mortgage rates seeing no financial upside in selling. While its grip on the market weakens over time, the market continues to grapple with a shortage of available homes.

The second major issue is persistent low home inventory. Although new listings have seen a modest increase, they remain insufficient to meet demand.

This imbalance between supply and demand has contributed to intense competition among buyers, driving up prices in many markets and making it difficult for aspiring homeowners to find suitable properties.

However, there is reason for cautious optimism. A recent uptick in new listings suggests sellers may be increasingly willing to enter the market, potentially easing some of the pressure on inventory levels. Listings are still below pre-pandemic numbers, but are up 35% from May 2023.

Beginning in 2020, the coronavirus pandemic caused an unexpected explosion in home demand. Coupled with ultra-low mortgage rates, home prices surged and have remained elevated.

Even if demand moderates, today’s buyers face the challenge of higher mortgage rates. While still low by some measures, this shift has prompted some buyers to reassess their purchasing timelines or explore alternative financing.

Forecasts are calling for a modest decline in mortgage rates in 2024, accompanied by steadier home prices. Rising new-home sales will continue to offer some relief to the market. But new construction alone cannot bridge the housing supply gap.

While any price moderation is welcome news for buyers who have been grappling with affordability in recent years, sellers might be underwhelmed by some of the offers. As balance slowly returns between supply and demand, sellers may need to manage their expectations and pricing strategies accordingly.