Monday, October 2, 2023

US home prices continue to rise despite the “slowing down” in demand

The fall in demand isn’t preventing US home prices from rising. The culprits are high interest rates, limited supply, and owners withholding new mortgages. To unravel the unusual dynamics of a market that’s often taken as a barometer of US economic growth, it’s worth rethinking traditional expectations about the impact of interest rates Interest in housing supply and demand

On the one hand, the sales volume has fallen sharply. “He’s hit rock bottom. Expectations Glenn Kelman, CEO of real estate agency Redfin, says that the only ones moving home are those who “have no choice but to do so.” On the other hand, prices remain high, especially in markets with a shortage of available bricks, where Bid wars are still the norm and it’s hard to find good bargains.

If they had said that a year ago that the Federal Reserve would raise the federal funds rate by more than 5%, but house prices are rising, The United States would sink only slightlyYou probably would have thought it was something straight out of science fiction. But that’s exactly what happened. According to the National Brokers Association, Existing home sales in the North American country have fallen nearly 17% since last July. However, the cost, measured by the S&P CoreLogic Case-Shiller US National Index, is down just 1.7% since last May.

Normally, We assume that a higher interest burden would act as a deterrent to home buying activity. But demand remained surprisingly robust, boosting the US economy more than many would have expected. “In its efforts to curb rising inflation, we believe the Federal Reserve has been raising interest rates so rapidly that monetary tightening has tightened supply of existing housing more than demand, resulting in prices that are stubbornly high today commented Eric Winograd and James T. Tierney, AllianceBernstein analysts.

When the best strategy is to stay there,

How did that happen? The average interest rate on a 30-year fixed-rate mortgage increased from 3.1% at the beginning of 2022 to 7.6% currently. Comparing average house prices in early 2022 to current ones and assuming a 20% down payment results in a monthly difference in interest expense of about $1,200 per month. Few People want to move out of their current homes and forego low-interest mortgages in favor of buying more expensive properties at higher interest rates.

Meanwhile, chronic shortages in the construction sector have exacerbated an already tight supply, which remains well below the previous level before the pandemic. The net effect was a downward shift in the supply curve, which put pressure on existing home sales. In a way, US housing can be viewed through the same prism as other sectors experiencing supply chain disruptions. “We see parallels to the automotive market. Americans saw the chain having problems. “Supply chains have been running out of inventory during the pandemic, which has pushed up prices for new and used vehicles,” say Winogard and Tierney.

The Manheim Index of Used Vehicle Value is up 65% through 2021 from pre-pandemic levels. Since then, it’s been down 17%, with downward momentum. The tipping point came as the auto industry ramped up production and began replenishing depleted inventories. “We believe the same thing needs to happen in the US housing market,” say two experts.

Given the mixed signals for the real estate market, what can we expect in the coming years? The reality is that much depends on monetary policy. Interest rates—and therefore mortgage rates—are nearing their peak in the US and will eventually stabilize near current levels. “With interest rates still high, we don’t expect a dramatic increase in home purchases, but we don’t expect a significant slowdown in demand either,” say analysts at Alliance Bernstein. As in the last two years The sticking point will be the offer. In the face of long-term inventory constraints, the US housing market needs interest rate stability for construction activity to pick up.

A greater supply of housing could have a positive impact on economic growth while preventing rising house prices from disrupting the general process of disinflation. If interest rates don’t rise much more—or if they don’t fall sharply—the housing market could contribute to the relatively soft landing we are currently forecasting. Meanwhile, expect the housing market to challenge historical norms. While the cities recover their equilibrium and core inflation is cooling, property prices could remain high even if sales volumes are not impressive. Ultimately, the Federal Reserve and homebuilders may hold the key to the American Dream.

World Nation News Desk
World Nation News Desk
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