The housing market has once again started to rally after being down south in the winters of last year.
Mortgage rates have been facing the heat of soaring interest rates. The Federal Reserve, the central bank of the nation that has a de facto rule over the financial realm of the world, has raised rates to 5.6%, their highest in the past few decades. It is astonishing to witness a collective rate hike of 5% over the past one and a half years. This has increased the mortgage rates to nearly 7%, the highest in the past two decades.
Jerome H. Powell, chairman of the Federal Reserve, aims to bring inflation under the control of the government and slow down the American economy. These steps for inflation control, in turn, have brought a tough time for the housing market. Earlier, the sections of the economy linked with interest rates cooled down due to the sudden rate hikes. But, the housing market crisis started to take place, particularly last year, with mortgage rates skyrocketing.
Housing Rebounds
The housing market has once again started to rally after being down south in the winters of last year. Southern cities like Miami, Tampa, and Charlotte have seen a strong surge in housing prices. Some numbers released last week depicted that prices surprisingly started to surge in May nationwide, rallying the most since 2016. Some experts commented that this could be due to an increased number of applications to construct homes.
According to the Fed, the economy needs to move at a slower pace for inflation to come under a reasonable limit. Because a weaker economy will lead to a reduced flow of money or lesser purchasing power, so ultimately, if people purchase less and companies will be left with no option other than lowering their rates.
But, the fresh rebound in the housing market is telling a different story. Though the increasing housing prices are not included in the official data of the inflation figures as these are based on rental rates rather than the costs of buying a home. This rebound also shows that the Fed’s decisions have proved to be inefficient in curbing the growth of the economy. Even the labour market is standing upright with a stronger stance, and consumer balance sheets are in a much better position than before the pandemic.
The Fed officials have been caught off guard because their justification for raising rates to curb inflation is turning futile. The economic activities are, in fact, increasing, with real estate developers pouring in investment, construction companies enjoying healthy sales, and home purchasers feeling optimistic due to the increase in home equity.
Cultural Dynamics
A popular culture amongst the American youth is of moving out from their parent’s house after high school and living on their own. The current Millennials account for the largest block of the population in the United States. These people are in their late 20s and early 30s, which is considered quite late to move out, looking for a house to purchase. This has brought significant potential homebuyers into the housing market.
A study based on the research co-written by Aam Ozimek, the chief economist at the Economic Innovation Group, showed that another kind of buyer is those that want a place in isolation for remote working. These are people who were living with their parents or roommates and now want to move out to live on their own. These remote-working people are responsible for increasing home equity.
Supply-Demand scenario
Daryl Fairweather, Chief Economist at Redfin, said that a surprising point to notice is the balanced effect of increased rates upon demand and supply. She added that the developers are profiting from the reduced supply clubbed along with a larger decrease in demand.
Michael Fratantoni, Chief Economist at the Mortgage Bankers Association, said that the debut buyers had exceeded the expert estimation of a house purchase.
Back in late 2020 and early 2021, when the interest rates were almost negligible, loads of people refinanced their mortgages and are now hesitating to sell their houses and take a loss on such cheap mortgages. This has reduced the supply of houses for sale in the market hence pushing the prices even higher.
Igor Popov, chief economist at Apartment List, said that the rent growth is calm and breathing air, with no signs of a fresh rally. Rent has been stagnant for months now, which is now slowly coming under the official inflation data as more and more people renew their leases.