Commentary
With the Federal Reserve (Fed) committed to raising interest rates still further, the future of the housing market remains problematic.
The higher mortgage rates rise, the less affordable housing will become for the average American. Buying and building will accordingly fall even farther than they already have. In time, however, a counter-trend will likely develop as potential buyers come to appreciate how residential real estate offers them at least a partial hedge against the effects of inflation. They will accordingly stretch to buy despite high financing costs.
So far, all the pressure has been on the downside. The Fed’s anti-inflation efforts have driven mortgage rates up from about 3 percent early in 2022 to 6.5–7 percent at present. Because of this rise in financing costs, affordability, as tracked by the National Association of Realtors (NAR), has accordingly declined some 33 percent over the 12 months through November, the most recent period for which data are available. Homebuying has followed, falling 15.3 percent over this same time, as has new home construction, with starts of new dwellings falling some 22.4 percent. Not surprisingly, home prices have weakened as well. The NAR’s measure of median home prices is off 10.5 percent from its highs of last June….