Why U.S. Home Prices Keep Rising Despite 6.55% Mortgage Rates

The US housing market is showing a contradiction on the surface.

New residential construction jumped 19% in June, driven by a multi-family apartment boom.

But underneath the underlying trend for single family homes is completely flat, and mortgage rates have spiked back to a one-year high of 6.55% as the US-Iran peace truce breaks apart and this interest rate drag has turned residential investment into a chronic drag on the economy while Buyer bench and flooded inventory lingers longer.

Wealthy boomers are using cash to drive the median price to a fresh record high.

Well here to weigh in is Jeff Ostrosky, housing market analyst at that great.

Good morning, Jeff.

Thank you so much for joining me.

We're all watching mortgage rates as well as median home prices, which did hit another record high.

So for the average retail investor or everyday buyer, will home prices just continue climbing out of reach.

Yeah, it seems as if home prices are going to keep rising, and, and you really mentioned that disconnect, um, You know, I mean the mortgage rates are up, but home prices are still at record highs.

Some of that is driven by what you just described, which is boomers who have a lot of equity, either they're selling one house and paying cash for another, or they're, they're cashing in some stock market gains and paying cash for houses.

So that's helping to keep home prices elevated.

The other factor is, as you mentioned, there's just not a lot of construction.

Um, there, there are some localized gluts of new homes, places like Austin, Texas, Sarasota, Florida, but in general, just not a lot of new home building, um, outside of that multi-family, uh, the boom that you mentioned.

And the latest data also shows that seller listings actually outnumber active buyers, which normally means that property values should plummet.

But why is this basic law of supply and demand broken in the housing market right now?

Yeah, so the, the supply and demand structure is kind of weird right now and has been strange since the pandemic.

So, of course, everyone remembers during the pandemic, mortgage rates plunged to record lows.

You could get a 30 year fixed for less than 3%.

So a lot of Americans were buying homes or they were refinancing during that period.

So that has really skewed what's happening today.

So what's known as the mortgage lock-in effect is this reality that most Americans are looking at their 3% mortgage.

They're thinking, well, maybe I'd like a bigger house, a smaller house, a different house, but I don't want to swap my 3% mortgage rate for a 6.5% mortgage rate, so they're just not doing anything.

And existing single family homes are one of the few places in the US economy where the supply is just determined by what individual Americans want to do on any given day, you know, it's not like the the factory can, can start churning out more houses to meet demand or the refinery can start, you know, producing more to meet demand.

Um, it's, it's a very idiosyncratic market, and so we're we're really seeing the effects of that right now.

So sales have been muted, prices keep going up just because there, there's not a lot of supply, um, and it's really creating a lot of frustration for, for buyers who are struggling with affordability.

Yes, and I think idiosyncratic and affordability are the key words right now, especially when we're looking at the breakdown in terms of generation and demographics.

It goes without saying that cash-rich boomers are dominating the market by snapping up properties with cash, while younger first-time buyers are benched by higher costs as well as higher rates.

So what does this mean for the American dream of home ownership moving forward?

Well, definitely the American dream of home ownership is still alive and well.

So surveys by bank rates and others show that most Americans, like 80+%, want to own homes.

They think that's part of the American dream.

But with the median home prices nationally at $440,000 it's just difficult for a lot of first-time buyers, um, so.

You know, pretty big affordability hurdles.

There still are very affordable major cities in the US, Places like Buffalo and Pittsburgh and St.

Louis and Indianapolis are very affordable, but the coastal markets, the boom economies are very unaffordable right now.

And so it's just, it's making it difficult for first-time buyers.

And so that's playing out in a lot of different.

Ways, median age of first-time homebuyers is all the way up to 40 now, so Americans are waiting a lot longer to buy homes, and it definitely has created just a lot of resentment, a lot of angst among those people in their 30s, you know, pushing late 30s, and, you know, their, their parents had bought a home by that age, but they're just unable to.

So, yeah, definitely a, a, a difficult market with some generational conflict right now, given the affordability challenges.

And finally, before I let you go, we have about 60 seconds here, but for the retail investors looking to buy real estate stocks or even home builder ETFs, given the fact that we're seeing this boom in apartments, would you say that is a safe investment, or do you think that's just statistical noise there?

Uh, oh man, that's, uh, that's such a, a tough one.

If I, if I could give you the accurate answer for that, I would, uh, I probably wouldn't be, uh, sitting here, but, um, uh, I would say the, the housing play at the moment is a long term demand play.

So Americans always are going to need a place to live, whether that's rental housing or, or a place that they own.

The US population has continued to grow, and there's just a ton of pent up demand in the US economy for both home ownership and for household formation.

So, you know, definitely there was a big apartment building boom during the pandemic and a bit of overbuilding there, but it seems like that excess supply has, has been It has been absorbed in most parts of the country and so as you mentioned, the multi-family builders are starting to build again.

So I would say it's, it's hard in the long run to really lose by betting on Jeff, I'm sorry to interrupt, but we will have to wrap it up for today.

So thank you so much for weighing in today and thank you so much for joining us.

All right, thanks a lot.

Take care.