The Surprising Stability of Housing Prices

In the past, when the Federal Reserve set out to cool the economy and slow inflation, it counted on the housing market to play a key role. By raising interest rates, the central bank makes mortgages more expensive, trimming the number of buyers and reducing demand. Looking at the US housing market over the past 18 months, it’s clear that this historical relationship doesn’t fully account for the nuanced landscape of the present.

On a national basis, home prices have remained surprisingly resilient and have only declined incrementally from their record highs in spring 2022. In California, home prices have declined by -1.1% since last June.¹ This relative stability was unexpected since mortgage rates have doubled over a similar timeframe, dramatically increasing the monthly payments for new buyers.

Prices have remained resilient largely because there simply aren’t enough homes for sale. While this situation has been around for more than a decade, a new factor has exacerbated the problem: many homeowners with low-rate mortgages are opting not to sell.

Anyone who has lived in Berkeley knows the power of a rent-controlled apartment. Rent control caps the annual rental increase, as long as you continue to live there. For example, if someone moved into a rent-controlled apartment in Berkeley ten years ago for $1,000 per month, their maximum monthly rent would be $1,235 in 2023, despite the fact that the market rate for the same size apartment would be more than $3,000.² This creates a strong incentive for people to stay in their low-cost apartments, which can reduce the number of available units and push prices higher for new tenants. This same paradigm can be seen in today’s mortgage landscape.

At the end of 2022, nine out of ten existing mortgages were below 6%.³ Of those, two-thirds were below 4%.In the current market, rates for new mortgages are approximately 7%, making it financially difficult for existing mortgage holders to consider moving. In other words, there’s a form of rent control for 90% of homeowners in the US.

This situation has had a direct impact on inventory within the housing market. For the month of May, existing homes for sale or under contract were at their lowest level since 1999.⁴ In many places this has also meant that new construction has become the only game in town. Nationwide, newly built homes accounted for nearly one-third of single-family homes for sale in May, far higher than the historical norm of 10% to 20%. Builders can’t keep up with demand, with many still wary of overextending themselves after the lessons learned in 2008. This caution has contributed to a chronic shortage of new home construction over the past 15 years and exacerbated the challenges facing prospective homebuyers.

There are economic benefits that ripple through the local economy with each home sale, including expenditures related to moving costs, mortgage origination, home remodeling, and new furnishings. This ancillary spending provides a boost to the US economy; fewer home sales will contribute to a slower rate of growth.

Another ripple effect is the impact on the rental market. With mortgage rates substantially higher and purchase prices not materially lower, renting has become more affordable than buying in much of the United States. Even though the cost of renting has increased +4.1% since last year, the cost of buying a new home has increased considerably more over the same timeframe. In fact, the gap between the cost of renting and the cost of owning a home is the widest it’s been since 2006.⁵

The combination of these factors has led to a housing landscape that is hard to access if you don’t already have substantial assets – and yet, homeownership is one of the primary drivers of financial stability and generational wealth. An inability for first-time homebuyers to afford a home in many housing markets means the wealth gap between homeowners and renters will continue to widen.

The current housing market has provided yet another reminder that the path of market prices doesn’t necessarily align with the predictions of market pundits. Housing prices didn’t collapse as soon as interest rates rose, and the economy has remained more resilient than expected.

For many homeowners, one of the most impactful and lasting financial opportunities available over the past few years was the ability to refinance into a lower fixed-rate mortgage. Locking in a lower rate for years to come enhances financial security, effectively capping your housing costs and increasing your flexibility to put excess funds towards travel, regular expenses, or additional investment.

With so many homeowners incentivized to stay in their homes because of the mortgage rate “rent control” dynamic, turnover is likely to remain below historical averages. Those who need to move will still put their houses up for sale, but many more are likely hold onto their houses longer and renovate more. As long as the US economy remains resilient, the abundance of existing low-rate mortgages will keep housing inventory low and prices relatively high, rewarding current homeowners and creating a more challenging landscape for prospective homebuyers.

Resources
¹ California Housing Market Overview Redfin
² Annual General Adjustments (AGA) Approved by the Berkeley Rent Stabilization Board City of Berkeley
³ Nearly Everyone With a Mortgage Has an Interest Rate Below 6%, Prompting Many to Stay Put Redfin
⁴ National Association of Realtors
⁵ Buy-or-Rent Premium Is Highest Since 2006 Housing Bubble Bloomberg