Of the outstanding mortgages, 91% have interest rates below 5.00%. Getty Images
The U.S. housing market is embroiled in fierce competition as rivals clash. On the other hand, deteriorating affordability as mortgage rates surged from 3% to over 6% in 2022, shortly after the pandemic housing boom pushed national home prices up more than 40%, put downward pressure on home prices. there is On the other hand, many homeowners are reluctant to buy or sell new for fear of trade-offs with 2% or 3% mortgage rates, resulting in a shortage of existing inventory due to the so-called “lock-in effect.” is getting worse. One of them is in the 6% to 7% range, putting upward pressure on house prices.
Housing economists argue that neither force should be ignored.
Soaring mortgage rates in 2022 have caught many prospective buyers off guard, reducing purchasing power and making home ownership unaffordable. Mortgage rates have doubled in such a short time, making housing affordable (or perhaps better described as lack of affordability). Tracked by the Federal Reserve Bank of Atlanta The affordability crisis led to a home price correction last fall that hit the overheated Southwest and West Coast markets the hardest. This affordability crisis has left many potential buyers on the sidelines, hindering demand and leading to a slowdown in home sales.
At the same time, the housing market is being weighed down by a shortage of inventories. The lock-in effect is a term used to describe homeowners’ reluctance to sell their properties for fear of rising mortgage rates, resulting in a shortage of existing homes on the market. Homeowners are enjoying historically low interest rates and are reluctant to part with favorable financing terms, creating a bottleneck to housing supply. According to Realtor.com, the number of homes for sale in June 2023 is 26.2% lower than June 2022 and 28.9% lower than June 2019. This limited inventory stimulated competition among buyers and caused the initial rise in home prices. For most markets, it’s half of the year, or the best season.
To better understand the “lock-in effect,” consider the fact that 91% of mortgage borrowers have interest rates below 5%, and 70.7% of them have interest rates below 4%. For those homeowners, it doesn’t make much sense to sell or buy property at 6% or 7% mortgage rates right now.
It’s not just prospective buyers and sellers who are feeling the strain. The impact also extends to real estate professionals who rely on trading volumes for their livelihoods. With housing affordability deteriorating rapidly and available homes in short supply, realtors and brokers are struggling with limited opportunities to drive sales and earn commissions. Declining trading volumes are hurting financial stability and jeopardizing the viability of some businesses.
So who will survive? Will national housing prices fall due to tighter affordability, or will existing inventory shortages drive national housing prices higher?
House prices across the country have already bottomed out and are expected to continue rising over the next 12 months, according to companies such as Zillow and CoreLogic. With existing inventory in short supply, buyers have no choice but to raise prices, they said.
Mark Zandy, chief economist at Moody’s Analytics, has a different take. With mortgage rates slowly moving from about 6.5% in 2023 to 5.5% in 2025, and national house prices eventually falling about 8% from peak to trough, he said, the affordability of homes will continue to rise. expected to improve over the next few years. In other words, Zandi said, expect tighter prices to overcome inventory shortages.
“In our opinion, this [price] The decline will continue for the next three years, but there will be no cliff events here, but rather a slow descent,” Zandi said. luck.
In the unlikely event that Mr. Zandi’s team is wrong and “prices end up being higher than expected,” it’s because individuals are choosing to hide in their homes and stock shortages continue, leading to widespread lockdowns. He claims it’s due to the Yin effect. National housing prices rise.
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