With Interest Rates At A 40-year High, Why Aren't Home Prices Decreasing?

We get this question a lot here at Gorman Residential. Historically with higher interest rates comes lower home prices. So what gives this time around?

Simply put, sellers are not moving and – in turn – not becoming buyers. Generally speaking, buyers and sellers in the current market have a strong reason to move. Think job relocations, death, divorce, or other major life events. You may also see investors taking advantage of these higher prices, but overall both the supply and demand sides of real estate are being crushed by current interest rates.

So, what needs to happen to combat these interest rates? An increase in supply and stagnant – or decreased – demand. After the Great Recession, supply has never quite caught up with demand. While builders are continuing to build and currently account for nearly 50 percent of the Triangle market, they’re unable to build quickly enough to keep up with, or surpass, current demand. Builders also face regulations that limit what they can and cannot do. Decreasing these regulations to allow builders to rezone land, or allow developers to repurpose commercial office space into apartments or multifamily homes, could help with the supply issue, as well. The easiest answer to finding more supply beyond new construction, however, is to lower interest rates.

Decreased interest rates bring forth a much larger issue: housing affordability. With a decrease in interest rates comes the pent-up activity of those waiting to buy. A lower interest rate means more sellers, more supply, more buyers – many of which are the same sellers providing the supply – and more demand overall. Think: bidding wars, offers well over listing price, and higher due diligence fees. Otherwise, expect to see housing prices remain the same or increase even higher.

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