Mortgage Rates Are Soaring. So Are Home Prices. How?

As Americans sour on the economy and the Federal Reserve continues to fight inflation with interest rate hikes, a strange aspect of the housing market is attracting attention: Mortgage rates are increasing – but so are home prices.

How is this possible? Why are home prices higher than they were a few months ago, even though the cost of borrowing has skyrocketed?

Basically, we are still living through a mismatch of housing supply and demand. But be aware that signs point to this leveling out soon, and to the housing market approaching something close to a pre-COVID normal.

1. Home Supply Remains Low

If the housing market seems distorted, or at least strangely resilient, much of the responsibility lies in persistently low housing supply.

Quite simply, the supply of available housing remains historically low. Supply-chain slowdowns, challenges finding laborers, and the high cost of building supplies mean that new home building remains low, too.

Such low supply means that there is still more buyer demand for homes than available properties to purchase. Prices may not rise as rapidly as they did one or two years ago, but homes are still so scarce that they are still inching upwards.

2. Demand for Homes Remains High

With mortgage rates having gone up a startling 3% in the past year, why do people still want to buy homes?

For one, mortgage rates only seem primed to increase further. The Federal Reserve has promised more interest rate increases over the course of 2022. And if inflation doesn’t drop soon, the rate a buyer gets now might be the best they’ll see for years.

Additionally, a large swath of millennials are entering the first-time home buying market. Those with the means to navigate higher rates still indicate the desire to buy a home.

Finally, people concerned about a substantial housing market correction have expressed motivation to sell now, while prices are still high. The flip side: People who sell a home usually also need to buy one, ensuring that there is still demand in the housing market.

3. The Party May Be Winding Down

The past two years have been historic and hard to process – for real estate and society at large. But just as other aspects of business, finance, and daily life have slowly moved past the COVID-19 pandemic, simultaneously rising mortgage rates and home prices may be the last gasps of a turbocharged real estate scene.

Consider that applications for new mortgages have dropped significantly. Even amid low demand, so many fewer new prospective buyers will, over the course of months and years, cool the market to some extent.

Consider, too, that inflation is increasing the price of everything. If home price spikes in the recent past were tied to high demand and low supply, home cost jumps now may be more attributable to the higher cost of building new homes. Inflation has also contributed to higher wages, which means buyers may be able to afford a $400,000 home, whereas last year they were only willing to spend $350,000.

Overall, the Federal Reserve seems intent on bringing inflation under control – even if it means increasing unemployment. If rates continue to rise, mortgages will become harder to afford, and the housing market will be due for a correction to normalcy.

To view the original article, visit the Homesnap blog.