Home buyers likely to see their costs remain high even if rates crimp prices.
We haven’t talked about the housing market in a while, so let’s talk about home sales.
After a massive runup during 2020/2021, prices seem to be slowing down. That’s not the same thing as cooling off, though. Home values continue to rise, just not quite as quickly as before. The Actional Alerts Plus team recently looked at the latest sales numbers.
“The key takeaway from the report is that prices remain high as inventory remains extremely tight,” the AAP team wrote. “That supply constraint is crimping sales growth in the existing home market, as are increasing affordability pressures created by the high selling prices and rising mortgage rates.”
Rising mortgage rates in particular will create an open question. More expensive financing will almost certainly slow purchases in this market, but it’s also important to understand that rising interest rates don’t always reduce home spending by the purchaser.
They will likely reduce the rate by which property values grow, but they do so by diverting a larger proportion of a homebuyer’s budget from the seller (who collects the sale price of the home) to the banks (which collect the interest payments). Since more of the buyer’s budget needs to be dedicated to interest payments, they can in turn afford to offer less money for the house, pushing prices down.
However the buyer’s home spending as a share of income remains little changed. This means that the consumer buying power of home buyers in the rest of the economy will still be affected by high prices, since from their perspective the total cost of housing may not have changed.
