Everything is fine with housing. Real estate is cyclical, and typically when mortgage rates rise, sales fall and home prices fall; and eventually, as home prices fall, sales come back. But none of this happened.
Home prices have risen substantially during the pandemic housing boom as historically low mortgage rates and remote work fueled demand. Then inflation grew too much to ignore, and the Federal Reserve raised interest rates. This in turn has driven up mortgage rates (which appear to be at a two-decade high) and sales have fallen to near 30-year lows. But home prices have not fallen, significantly or overall, because no one is selling their houses. Essentially, there are more buyers and homes than sellers, so prices can’t fall.
“The reality is that about 70% of sellers are also buyers, so sellers are also sensitive in this environment,” says Zillow chief economist Skylar Olsen. said CNBC towards the end of last week.
Higher mortgage rates are generally considered a problem for home buyers due to higher monthly payments. But high mortgage rates also hurt sellers, or better yet, potential sellers, precisely because of what Olsen said: They’re basically buyers, too. And no one wants to give up a 3% mortgage rate for a rate that’s more than twice as high, so they don’t sell unless they absolutely have to. This is called the lock-in effect, and it’s why we saw existing home sales fall last year and as recently as March.
In March, “the markets that grew the fastest were actually the most expensive; it was the California coastal markets,” Olsen said. “Why was this? Well, those are the places where we’ve also seen the most aggressive pullback of, well, continued pullback of existing owners not putting their homes on the market.”
Olsen was referring to a recent analysis showing that monthly home price growth was most dramatic in the “Coastal California metro” (and Seattle). It showed home prices rose more than 3% in San Jose and more than 2% in San Francisco, San Diego and Los Angeles. In her analysis, she said, “it’s no coincidence” that these metropolitan areas also have the “largest share of homeownership likely to be locked into mortgage rates,” referring to another analysis that found the only housing markets with fresh supply are those filled with baby boomers who aren’t bothered by higher mortgage rates.
“Across the country, we still have a history of housing shortages,” Olsen said. At the same time, “a fair number of buyers are still willing to move on… A typical home that is pending in March. [sold] in just 13 days. Even at these prices, even at these mortgage rates.”
So, we don’t have enough homes (some estimates put us somewhere between two and seven million homes short) or sellers, but we have enough buyers. This is why housing prices are not falling. But of course, not all markets are the same. Texas and Florida “are areas where people are not as locked in…most of the population is free and mortgage free. These are older boomers, they moved there with capital gains over the last 15 years,” Olsen said.
She continued: “These are areas where we are not so locked in; this is where we see inventories returning and home prices falling. Home prices in Austin have dropped over the year…and are getting very, very low in other major Texas metropolitan areas.”
The average 30-year fixed mortgage rate is 7.44%, and it appears that as long as mortgage rates remain high, there won’t be enough homes or sellers to match buyers. And let’s not forget that there was already a housing crisis, and it’s only getting worse as people hold on to their homes and prices continue to rise.