Reaching levels not seen since the turn of the millennium, current mortgage rates have surged in lockstep with all the rate hikes. The 30-year fixed mortgage rate in 2000 stood at 8.25%, while at the time of this writing, it sits at 7.63%. Concurrently, the US Median Home Sales Price has risen to $394,300, with a slight decline from the peak of $413,800 which was posted in June 2022.

The chart below overlaps the 30-fixed mortgage rate to the US Median Home Sales Price since 2000.  While overtime you would expect real estate to appreciate, it’s reasonable to anticipate an inverse correlation between these two variables, considering that rising interest rates lead to higher monthly payments for new borrowers.

One of the core reasons that prices haven’t budged much is due to the next chart below.  Median home prices are in purple again and the monthly inventory is in orange.  Current inventory levels are sitting near record lows since this data has been reported.  This scarcity in available properties has effectively maintained elevated prices, countering the impact of the significant interest rate hike from under 3% in 2021 to nearly 8% currently.

The reluctance of most homeowners to sell their properties can be attributed to the substantial increase in mortgage costs. While rising rates would conventionally dampen home prices, this effect has yet to materialize due to the limited inventory. It is plausible that a reduction in rates might lead to a decline in home prices by stimulating an increase in the number of homes put up for sale.

A meaningful reduction in housing prices would necessitate a change in the total inventory, with the potential for either lower rates or an uptick in construction activities. At this time, we could see higher rates dampen pricing further, but inventory would need to tick up for prices to materially change.

Presented by the Financial Planning Committee of Lake Street, an SEC Registered Investment Adviser

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