Fortune

U.S. home sales in March are dropping to their lowest levels in months, but a shortage of listings means that prices are as hot as ever.

Ever since mortgage rates began rising earlier this year, demand for housing has been steadily cooling after months of rampant competition and bidding wars sent home prices soaring. 

The average 30-year fixed mortgage rate now sits at 5.3%, up 2.16% from 12 months ago, as the Federal Reserve began raising its policy interest rate last month. Lending rates have consequently been rising at historic speed, amounting to an economic shock for the industry.

The impact of higher mortgage rates can already be seen in the cooling demand for homes, the first step in normalizing the red-hot U.S. housing market. But although the number of buyers has fallen quickly, home prices are still at record highs, and they are unlikely to normalize before next year.

Home sales are down

New-home sales were down 8.6% in March, according to government data, the lowest housing demand has been in four months.

A combination of high borrowing costs and persistently high home prices is pushing more and more potential buyers out of the market. Because of these factors, home sales are likely to continue falling over the next few months.

New contract signings were also down in March, according to the latest pending-home sales report by the National Association of Realtors. The number of deals struck for homes fell by 1.2% last month, signifying that the group of people willing to buy a home is starting to shrink.

These two statistics tell the same story: More and more buyers are getting put off by higher mortgage rates.

“We would expect a continued decline over the next few months as buyers have to readjust their expectations to take into account the significant increase in mortgage rates that we’ve seen,” Mark Palim, deputy chief economist at government-backed mortgage provider Fannie Mae, told Fortune.

But while demand is beginning to die down, homes are still selling for record sums.

Prices are still high

Year-over-year home prices were up nearly 20% in February, the third-highest monthly price increase seen in 35 years. A big factor behind the price surge has been a lack of listings and new homes for sale to match the number of buyers in the market for a home, even as higher mortgage rates have begun shrinking this pool of buyers.

“Demand has been really strong relative to the available properties, which is why you’ve seen multiple bids, and why you’re seeing really strong home price appreciation,” Palim said.

In light of higher mortgage rates and lower demand, Fannie Mae has revised its monthly Economic & Housing Outlook, which now predicts a 10.8% rise in U.S. home prices through to the end of 2022, slightly down from the 11.2% increase it had previously forecast.

But even this revised price rise forecast is more than double the average annual home price increase that has been observed since 1987, meaning that homebuyers will still have to endure high prices for the rest of this year as well as high lending rates.

Palim says that an important part of bringing home prices back to a normal level of growth is to increase inventory and available listings on the market, but this is unlikely to happen soon. Most current homeowners bought their home with a much more favorable mortgage, and they are unlikely to put their home on the market if it means having to buy a new one at a 5% rate.

“It’s going to be a struggle to increase the number of listings,” Palim said.