High Rates, Low Supply: Home Prices Skyrocket To Unimaginable Peaks As U.S. Home Owners Stop Selling Out Of Fear Of Higher Mortgage Rates

The housing market has grown exponentially since the COVID-19 pandemic, with owner-occupied housing wealth rising to $9 trillion from the first quarter of 2020 to the first quarter of 2022, according to the Federal Reserve. 

The rising demand, resulting from ultra-low interest rates and limited supply, played a crucial role in bolstering the housing market. 

Despite the Fed's contradictory hawkish stance resulting in sky-high mortgage rates, housing demand has continued to grow. Average home prices reached a new all-time high in May, increasing by 0.7% month-over-month nationally, as reported by the Black Knight Home Price Index. The price gains have been ongoing since January, with May's prices 0.1% higher than the previous year. As of July 6, the average 30-year fixed mortgage rate reached 7.22%, the highest rate recorded since early November.

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7% Mortgage Rates — The New Normal

While the Fed's decision to pause interest rate hikes in June came as a relief to the markets and homebuyers, the sentiment quickly changed as Chair Jerome Powell indicated that the pause was temporary. 

"Nearly all [officials] expect that it will be appropriate to raise interest rates somewhat further by the end of the year," Powell stated in a congressional committee hearing on June 21. 

Home prices started declining last summer when the average interest rate on a 30-year fixed-rate mortgage more than doubled in just six months. The market began to recover in January because of renewed buyer demand, although it faced the challenge of limited housing supply. Over time, buyers seemed to have become accustomed to higher interest rates.

According to Andy Walden, the vice president of enterprise research at Black Knight, there is no doubt that the housing market has reignited in terms of home prices, as he expects the annual home price growth rate to increase significantly in the coming months.

By May, more than half of the 50 largest housing markets in the country, primarily in the Midwest and Northeast, had either returned to their previous highs in terms of housing prices or reached new record peaks.

Although home prices are still weaker in the West and certain pandemic "boom towns," where remote workers flocked during the earlier days of COVID, they are starting to stabilize. But only eight of the top 50 markets are more than 5% below their peak levels.

"Earlier this year, I shared that I believed 6% mortgage rates were accepted as the new normal. I think now we're in an environment where 7% mortgage rates are now the new normal, and people are accepting it," Compass Real Estate CEO Robert Reffkin said. 

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Dwindling Supply 

Last year, a significant rise in mortgage interest rates briefly cooled the overheated housing market. But the cooling effect didn't last long, and despite the rates remaining relatively high, home prices are again rising as housing starts remain low. The pace of price gains is accelerating each month.

The housing supply is dwindling again, with new listings down approximately 25% from the previous year. Many homeowners with sub-4% mortgage rates are hesitant to sell their properties, as it would mean potentially securing a new home with much higher interest rates. Total housing inventory is now about half of what it was just before the pandemic-induced housing boom. Sales of preowned homes have declined significantly year over year because of supply constraints.

According to the National Association of Realtors, the median price of a preowned home in May was $396,100. Bidding wars also have returned, impacting affordability. As of June 22, with 30-year rates at 6.67%, the monthly payment on a median-priced home with 20% down and a 30-year mortgage was $2,258 in principal and interest, the highest on record, slightly surpassing the $2,234 required back in October.

Portable Homes Disrupting the Housing Market 

Increasing housing costs have made homeownership a pipe dream for the younger generation, with many millennials and Gen Zers believing they'll never be able to own a home or work well into their 80s to pay off their mortgage. But many startups, such as Zennihome, are developing factory-built homes assembled in days. Zennihome's unique approach to housing can potentially disrupt the $2 trillion housing industry, with base model prices starting at $90,000. The company, which is still developing its product, has received over 40,000 soft launch orders.

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