For 18 years (from 2002 to 2020 ) the U.S. Federal Reserve Bank kept interest rates low. (This was especially the case after the Housing Bubble deflated in 2008, the Reserve Bank was lending out money near zero percent and even buying up bad debt, paying more for it than it was worth, in an attempt to prevent the Recession from being even worse.) But these years of low interest rates prevented housing prices from going down, and contributed to housing prices continuing to increase. At that time, I believed that these low interest rates were not sustainable and could not go on forever, though I did not know exactly how long they could last. I believed that the price of housing would eventually come down after interest rates shot up, though there might be a lag time of 3 or 4 years. After very late 2021 to 2022 we finally saw interest rates begin to rapidly shoot up. This was in response to inflation, from large continued government deficit spending, and the Reserve Bank did not believe they could continue to afford to hold interest rates down without causing more inflation. Mortgage rates shot up from 3.5% in July 2016 to 6.8% in July 2023. The question is, is that going to cause housing prices to come down, and if so, when? That is a little bit of a complicated question. Inflation, the same thing that has caused into interest rates to rise, also causes the price of housing to rise. (Not only in nominal unit terms but also some investors parking their money into real estate to try to protect it from inflation) Then there is the fundamental question of how much housing prices have been kept up by cheap low-interest rate loans and the Reserve Bank pumping so much money into the economy. What has been seen in 2023 is a lot of investment banks and funds (such as BlackRock) buying up houses, and then using property management companies to rent them out. There is a lot of money out there in the hands of wealthy investors that have also raised the price of housing. (As the percentage yields on other investments have gone down and economic growth slows, investors have turned more to rental properties to draw a return on their money) And continued large scale immigration also continues to add to population numbers, creating a chronic housing shortage and keeping housing prices and rents high, especially in high population areas with limited space for new building. As interest rates have shot up, we should expect to see the price of housing come down. But there is also still inflation going on, at a substantially higher rate than normal. (The inflation rate in 2023 was 3.1%. In 2022 it was 6.5%) This is also a factor causing the price of housing to continually increase. Data source: Redfin, by Elena Cox Stacker - Real Estate - The 2023 housing market in 5 charts "Home prices remain elevated, Median sale price up slightly in February after peaking in May 2022" There are signs that the price of housing might soon go down, or at least stop increasing. Number of home sales began plunging in June 2022. Homes sales in July 2023 were 32.5% lower than in July 2021. Home sales are now down to a level not seen since late in 2010. US existing home sales slump to more than 13-year low, prices accelerate , Reuters, by Lucia Mutikani, November 21, 2023 "The combination of high prices, high mortgage rates, and millions of homeowners unwilling to move, given they've locked in low rates, has frozen the market," said Robert Frick, corporate economist at Navy Federal Credit Union in Vienna, Virginia. Existing home sales tumbled 4.1% last month to a seasonally adjusted annual rate of 3.79 million units, the lowest level since August 2010 when the sales were declining following the expiration of a government tax credit for homebuyers.
