Mortgages, Interest Rates, and the Housing Market

April 24, 2024

Over the last 2 years, our housing market has been shaped by a couple of dominating factors. Factor one is the general acceleration of the interest rate environment. Factor two is the availability of homes to buy. It’s all highly regional Some places have higher demand than others, but let’s stick with the big picture.

According to the Federal Reserve of St. Louis, in July of 2019, there were 1.24 million homes listed for sale. As of March 2024, there were 695,000 active listings. That’s a reduction of over half a million homes. The basic concept of supply and demand leads us to a straightforward conclusion. As fewer homes have been put on the market over time, the balance of supply and demand would indicate that sellers are in the driver’s seat. They can demand higher prices for the homes they’re selling.

Let’s take a look. The mean sales price for single-family homes in 2021 was $357,000. In 2023 that number was $394,000 (National Association of Realtors, 2024). What’s the takeaway? Fewer people are selling their homes and a scarce supply leads to higher prices.

Enter the interest rate dilemma. The Federal Reserve has tried to combat inflating prices all across the economy by raising their core interest rate. Housing is especially sensitive to interest rate movement, as most home buyers finance their purchase with a mortgage.

A generally rising interest rate environment is SUPPOSED to curb demand and bring balance back to the force (Star Wars reference…I couldn’t help it). If mortgages get more expensive, then there will be fewer buyers, and those that are buying can’t afford higher prices for homes. A $100,000 mortgage at 3% only incurs $3,000 in interest in a year. A $100,000 mortgage at 7% incurs $7,000 in interest. That’s $333 more in monthly mortgage payments for the same amount of debt.

The expectation is that fewer buyers would enter the market, and it would level out the inventory problem. Fewer homes for sale isn’t a huge problem if there number of home shoppers drops by the same amount.

That’s where the biggest problem arises. Some people are going to buy houses regardless of the market. Life changes can demand that a person buy a home, regardless of market conditions. Again, according to the National Association of Realtors, 4.5 million people bought homes in 2023, despite higher interest rates and lower inventory.

What’s the takeaway? It seems that the housing market in the U.S. has somewhat of a “floor”. Barring something catastrophic, a certain number of homes are going to be bought/sold regardless of market conditions.

This is one example of how inflation can remain so “sticky”. While the Fed can curb SOME demand issues by raising rates and scaring away some home shoppers, it can’t build millions of homes and fix the biggest issue which is a large lack of supply. Only a lot of construction and a fair amount of time can bring balance back.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical

and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.