The rise in home prices over the past decade has been spectacular, proving a boon to those already owning homes, but a hurdle for first time home buyers. Fueled by ultra-low interest rates, the average price of houses sold in the United States rose from $275,200 in the first quarter of 2014 to $420,800 in the first quarter of 2024, a gain of more than 50% according to the U.S. Department of Housing and Urban Development. But in 2022, interest rates began to spike, and the Housing Affordability Index collapsed to levels not seen since before the housing crisis, prompting many to predict another drop in home prices. But so far, home prices have proven surprisingly resilient in the face of higher rates. What is next for housing?
As we wrote last year, there seems to be a stand-off between buyers and sellers in the housing market. On the one hand, owners who have low interest rate mortgages are extremely hesitant to sell, especially if it means moving to a new home with a much higher interest rate mortgage. Many owners are still expecting peak prices for their homes and expect prices to rise. On the other hand, buyers find homes incredibly expensive. The housing affordability index, which compares the typical mortgage to the typical family income, is at levels not seen for at least 20 years. This means that many would-be buyers are priced out of the market. Thus far the buyer-seller battle has essentially been a stand-off with prices remaining remarkably strong, but in a market where the number of actual transactions is far below normal. Neither buyers nor sellers have had the upper hand.
However, over the past 2 years builders have stepped in to fill the gap, especially in population growth states like Texas and Florida. Multi-family construction has kept rental prices from rising too fast. According to the Wall Street Journal, more than half a million new apartments opened in 2023, the most in 40 years. At the same time, single family home construction has brought more inventory into the stagnant housing market. Slowly, single-family inventory appears to be growing. Active listings for homes for sale have grown more than 15 percent year over year according to redfin. While inventory levels are still normal, the trend appears to be favoring buyers.
It appears that cracks are beginning to form in the housing market. Having said that, there is still too much demand to expect a 2008 style collapse. The most likely outcome is a cooling off, especially in markets that have been particularly hot. If interest rates fall then it is tough to predict who would gain the upper hand. Lower interest rates generally improve affordability and put upward pressure on prices, but lower interest rates could also enable sellers who have delayed selling to finally put their homes for sale, releasing pent-up selling pressure.
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