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Despite a series of contractionary efforts by the Federal Reserve, house prices remain stubbornly high. Even though mortgage rates are at their highest level in more than a decade, house prices have only risen this year. So why are house prices so expensive right now?
The current state of the US real estate market is largely due to the mismatch of supply and demand in the country. The simple fact is that homes are not being built fast enough to keep up with supply, leaving only a small stock of real estate available for buyers. In fact, the United States currently has about two months’ supply of available homes, compared to the pre-pandemic level of about six months.
That said, mortgage rates are causing demand for housing to drop significantly. The volume of mortgage applications has fallen by more than 50% this year, mainly due to high lending rates. Many economists believe that the continued pressure on mortgage rates could properly rebalance the housing market, leading to lower prices. At the very least, house price growth will cease its seemingly relentless acceleration.
Why are house prices still high?
Home prices topped $400,000 for the first time last May. Indeed, the median selling price of existing homes last month was $407,600, even as 30-year fixed mortgage rates hover around 6%. It’s a puzzling phenomenon for many real estate brokers, who have seen home sales decline month after month as home prices continue to rise.
The disappointing supply of homes over the past few years has resulted in something of a pile-up for hopeful homebuyers. The Covid-19 pandemic immediately slowed the pace of home building in the United States, which was already operating at a slower pace after the housing market crash of 2008. Even despite unpalatable buying conditions, buyers most committed house owners are still buying houses. As a result, even the most brutal cooling forces have yet to play out in the housing market.
Pent-up demand for housing is expected to subside, or at least subside, over time. There are already signs of a catch-up between supply and demand. In the four weeks ending May 22, almost 20% of home sellers lowered their asking price. This represents the highest monthly rate since 2019. That said, completed home sales, which are declining in volume, are still well above the asking price.
Ali Wolf, chief economist at housing market research entity Zonda, recently commented on the state of housing in the United States: “We are at an inflection point for the housing market. There are early signs that some fundamentals are weakening, such as an increase in the number of homes with price cuts, an increase in cancellations in new housing communities and more loan officers reporting that buyers are starting to s ‘stretch.
As of the date of publication, Shrey Dua did not hold (either directly or indirectly) any position in the securities mentioned in this article. The opinions expressed in this article are those of the author, subject to InvestorPlace.com publishing guidelines.