Surging Home Prices Squeeze Supply Amid High Rates

According to the Black Knight Home Price Index, home prices increased by 0.7% from April to a new record high in May. Despite high mortgage rates, home prices have steadily risen since January, with May’s month-over-month gain suggesting an annualized growth rate of 8.9%. The housing market has reignited, and the annual home price growth rate is anticipated to continue to trend sharply higher in the coming months.

While prices have reached or exceeded their earlier highs in some areas, including the Midwest and Northeast, the West and pandemic “boom towns” originally had lower property prices. Price stability is being observed in places like San Jose, California, where there was an increase of 1.4% in May. As homeowners with low mortgage rates hesitate to sell and risk higher rates on a new house, inventory levels are dropping. Overall, the number of new listings is down by around 25% from the previous year, and the entire inventory is nearly 50% lower than before the pandemic.

Although pre-owned home sales are still down from a year ago, the primary reason is a smaller supply rather than higher prices. In May, the median price of a previously owned property was $396,100, and bidding wars have increased in frequency, affecting affordability. The monthly payment for a median-priced property is the highest ever, underscoring the difficulties purchasers currently face in the market, with mortgage rates hovering at 6.67%.

First American’s Mark Fleming: Why Higher Mortgage Rates Don’t Always Lead to Declining House Prices

Chief Economist for First American Financial Corp., Mark Fleming, highlights that rising mortgage rates don’t always result in declining house prices.

In April, housing affordability improved due to rising incomes and falling rates, despite nominal house price growth. House prices have shown resilience to increasing mortgage rates throughout the past three decades, except during the 1994 period and the 2005–2006 U.S. housing bubble. In other instances, house prices continued to rise, albeit at a slower pace, when rates increased.

Various factors, such as the economic environment and housing supply shortage, influence the relationship between mortgage rates and home prices. While higher rates may slow price growth, they typically do not cause prices to collapse entirely, especially in today’s market, where demand exceeds supply.

Rates Dip Below 7% After Inflation Data

In the previous two weeks, mortgage rates had been climbing quickly and had risen as high as 7% for a top-tier conventional 30-year fixed scenario. Stronger-than-expected economic data and worries about upcoming reports were the main drivers of this surge.

The June Consumer Price Index (CPI) showed inflation slowing to a level near the Federal Reserve’s objective, which provided some consolation. This information eased concerns about more rate increases, which caused rates to noticeably decline by more than an eighth of a percentage point, returning to the high 6% level. Even if this is just the start of a lengthy journey, it offers some much-needed short-term relief.

Source:

Vaimberg, Ron. “Weekly Newsletter – January 6, 2023.” Ron Vaimberg International, Ron Vaimberg, 6 Jan. 2023, https://rvionline.thinkific.com/courses/take/rvi-weekly-newsletter/texts/41523497-weekly-newsletter-january-6-2023.