Despite a slew of contractionary efforts from the Federal Reserve, home prices remain stubbornly elevated. Even as mortgage rates rise to the highest level in more than a decade, home prices have only grown this year. So, why are home prices so expensive right now?
The current state of the U.S. housing market is largely due to the supply and demand mismatch in the country. The simple fact is that homes are not being built fast enough to meet supply, leaving only a small stockpile of available real estate for homebuyers. In fact, the U.S. currently has about a two-month supply of available homes, compared to the pre-pandemic level of about six months.
With that said, mortgage rates are pushing the demand for homes down tremendously. The volume of mortgage applications is down more than 50% this year, largely as a consequence of high lending rates. Many economists believe that continued pressure on mortgage rates may adequately rebalance the housing market, resulting in lower prices. At the very least, the growth in home prices will cease its seemingly relentless acceleration.
Why Are Home Prices Still High?
Home prices exceeded $400,000 for the first time ever this past May. Indeed, the median existing-home sales price last month was $407,600, even as 30-year fixed mortgage rates hover around 6%. It’s a confusing phenomenon for many real estate brokers, who have seen home sales decline month after month as the prices of homes continue to ramp up.
The underwhelming supply of homes the past few years has resulted in something of a pileup for hopeful homebuyers. The Covid-19 pandemic immediately slowed the rate of home construction in the U.S., which had already been operating at a slower pace following the 2008 housing market crash. Even despite unpleasant buying conditions, the most committed homebuyers are still purchasing homes. As a result, even the most brutal of cooling forces have yet to play out for the housing market.
The pent-up housing demand is predicted to subside, or at least ease, with time. There are already signs of a catch-up between supply and demand. During the four-week period ending May 22, close to 20% of home sellers lowered their asking price. This represents the highest monthly rate since 2019. With that said, completed home sales, which are declining in volume, are still largely coming in over asking price.
Ali Wolf, chief economist at housing market research entity Zonda recently commented on the state of housing in the U.S.: “We are at an inflection point for the housing market. There are early signs of some of the fundamentals weakening, such as an increase in homes with price cuts, a rise in cancellations at new-home communities, and more loan officers reporting buyers are starting to stretch.”
On the date of publication, Shrey Dua did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.