The housing market is a puzzle these days. It doesn’t follow normal logic. Experts thought prices and rates would fall, but they haven’t. Home prices keep going up even with super-high interest rates. More homes were expected to hit the market, but that hasn’t happened.

What gives with this contradiction-filled housing market? You’d think those sky-high home prices paired with steep mortgage rates would have cooled things off by now. I mean, what goes up must come down, right? But the market has its own peculiar physics, with multiple forces keeping both prices and rates aloft, while homebuyers scratch their heads. In the meantime, experts will keep making predictions until the market pulls the rug out from under them again.

Why Haven’t Home Prices Fallen?

Buyers hoped prices would dip. After years of wild increases, it seemed overdue. Many big names in real estate said high rates would push prices down. There’s a limit to what buyers can afford, after all.

But that’s not what happened. Sure, median list prices dropped in some markets that went nuts during COVID-19,  (Austin and Miami). But nationally, prices flattened out, dipping just a bit before climbing again.

Now they’re surging in traditionally affordable areas like the Rust Belt and Midwest. Why? Buyers priced out of costly areas are chasing affordability. Ironically, that’s driving up prices in these regions.

High prices and rates are tough hurdles. But some buyers can still make the math work. With a severe shortage of homes, buyers compete fiercely, pushing prices up in bidding wars.  Surprisingly, high prices and rates often go hand-in-hand. Past rate hikes mildly boosted prices, says Laurie Goodman of the Urban Institute.

Typically, the Fed raises rates to control inflation when the economy is strong. More folks can and want to buy homes in good economies. Extra competition can nudge prices up slightly.

“With high rates, there are fewer buyers and sellers,” says Goodman. “But enough can still afford to buy. Prices don’t fall because the economy is strong.”

Instead, home sales drop. Sales of existing homes fell 16.6% in July 2023 compared to 2022, says the National Association of Realtors. “The market freezes up,” says economist Ken Johnson of Florida Atlantic University. “Transactions plummet dramatically.”

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Mortgage Rates Are Higher Than They Could Be

Mortgage rates are also higher than many believe they should be. Rates reflect Fed actions but investors play a huge role too. Rates averaged 7.19% in late September 2023, per Freddie Mac.

This gets technical. Rates could be a full percentage point lower based on the spread between mortgage rates and 10-year Treasury bonds. The spread is larger than normal, suggesting room for rates to fall.

Higher mortgage rates show “uncertainty around interest rates the Fed controls and the economy’s future,” says Goodman.

There’s more. Lenders rarely hold mortgages—they want to free up cash for new loans. So mortgages get bundled into securities called mortgage bonds and sold to investors. When bond prices are lower, rates rise to attract investors.

And investors worry the Fed may hike rates again, likely lifting mortgage rates too. They want compensation for shorter loan lengths (due to future refinancing) and housing market uncertainty.

Rates spiked to 7.47% the day after the Fed hinted at another 2023 rate increase, says Mortgage News Daily. “Rates could cool to 5-6% next year,” says Yelena Maleyev of KPMG. “But they could climb higher.”

With Few Homes for Sale, New Construction Gets a Boost

Many expected more existing homes to hit the market this year. That hasn’t happened. Instead, new construction saw strong sales.

“Those don’t usually go together,” says Devyn Bachman of John Burns Real Estate Consulting. “There are logical reasons for the oddities now happening.”

Builders succeed by buying down rates, says Bachman. Some secure 5% rates for buyers temporarily or the entire 30-year loan. They’re also lowering list prices and covering closing costs.

New builds used to be pricier than resales. But July 2023 data showed a median $436,700 for new homes versus $406,700 for existing.

So builder incentives and smaller price gaps can make new construction more affordable than resales today.

New construction is also selling because more homes are available. Higher rates limit housing inventory, as homeowners who would have sold stay put.

“We call it a mortgage winter. People are frozen in place,” says Maleyev. “If they don’t have to move, they’ll think twice about listing with double the rates.”

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5 reasons there will be no housing market crash

Recent data suggests a housing market crash is unlikely in the near future for several reasons:

Home inventory remains low. The National Association of Realtors reported a 3.3-month supply of homes for sale in August 2022, up from 1.7 months in early 2022 but still below normal levels. Low inventory limits choices for buyers and supports higher prices.

Homebuilding has not kept pace with demand. Builders reduced construction after the last housing crash and have not returned to pre-2007 levels despite strong demand. Quickly ramping up land purchases and securing regulatory approvals appears difficult, limiting supply growth.

Demographic trends drive demand. Work-from-home policies, millennials entering prime homebuying age, and a growing Hispanic population have increased interest in homeownership.

Mortgage standards remain stringent. The median credit score for mortgage borrowers was 769 in Q2 2022, indicating lending largely limited to those with excellent credit. This differs from the “liar loans” common before the last crash.

Foreclosures are historically low. Most homeowners currently have significant equity and lenders reduced foreclosures during the pandemic. Though increasing recently, foreclosures remain far below pre-crash levels.

While home prices are testing affordability limits, these factors suggest a repeat of the mid-2000s housing boom and bust appears unlikely.

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Conclusion 

The housing market continues to bewilder buyers, sellers, and experts alike. While high prices and mortgage rates defy expectations, demographic trends and limited inventory appear poised to sustain demand. Foreclosures remain low, mortgage standards are strict, and inventory is constrained.

Recent data suggests a housing crash is improbable in the near term. Homebuilding lags demand, keeping supply tight. Strong demographics drive interest in homeownership. Most owners have significant equity, and lenders avoid risky loans. While testing affordability limits, these factors indicate today’s market differs from the mid-2000s bubble.

Rather than a dramatic correction, we may continue to see moderation. As prices and rates plateau, fewer buyers jump in, slowing sales. But chronic undersupply leaves little room for prices to fall. New construction and more sellers may gradually ease shortages. Until then, contradictions will likely persist, sparking endless speculation and keeping real estate professionals on their toes.

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