The US inflation continues to cool down as the Labor Department reported a 2.9% year-over-year increase in the Consumer Price Index (CPI) for July, lower than the market’s expectation of 3%. This marks the fourth consecutive month of inflation easing in the US, reaching its lowest level since March 2021. However, compared to a year ago, housing costs have risen by 5.1%, accounting for nearly 90% of the overall inflation growth.
According to The Economist, in 2021, mortgage rates hit rock bottom and since then, the typical 30-year mortgage rate in the US has risen by around 4 percentage points. Academic experience suggests that home prices could fall by 30% to 50%. However, in reality, home prices have barely seen a decline.
Data from real estate brokerage firm Redfin shows that the median home prices nationwide have risen by over 4% in the past year.
When Americans buy homes, they usually negotiate for long-term fixed-rate mortgages with banks. These mortgages are not affected by central bank interest rate hikes, thus alleviating concerns of increasing mortgage payments due to interest rate hikes and reducing the risk of foreclosure or home auction for homeowners.
In general, fixed-rate mortgages make homeowners less inclined to move, as switching homes would involve negotiating new loan terms, potentially facing higher interest rates and paying more interest.
However, despite being in a high-interest-rate era, home prices continue to soar. The National Association of Realtors found that surprisingly, high-interest rates have not deterred Americans from buying homes.
The Economist points out that the continued rise in home prices may be attributed to factors such as immigration, sacrificing future consumption, and economic strength.
The first factor is the increase in immigration. The annual growth rate of foreign-born populations in affluent countries is about 4%, the fastest on record. Official data may still be underestimated as illegal immigration to the US is also on the rise. Mark Zandi of Moody’s Analytics believes that this has further driven up housing prices and rents as new immigrants need a place to live.
The second factor driving up home prices is sacrificing future well-being. Currently, people prefer long-term mortgages, with extended loan terms, signifying borrowers are prepared to repay over the long term, sacrificing future consumption to reduce current mortgage expenses. People in affluent countries are currently cutting back on other expenses to cope with mortgage costs.
The most crucial factor is household economic conditions. While households paying mortgages may see an increase in interest payments, people’s incomes are also rising. For instance, savings are earning higher interest income, and wages are steadily increasing. Since 2021, average wages in affluent countries have risen by about 15%, and the unemployment rate remains close to historic lows. While high mortgage costs are not ideal, most people can afford them.
According to USA TODAY, Michael Neal, a senior researcher at the Urban Institute’s Housing Finance Policy Center in Washington, DC, believes that soaring home prices and the burden on buyers are already dampening real estate sales and construction activity, hindering overall economic growth.
Yet, looking at the current situation, the heat in the real estate market may continue, and home prices could keep rising. With inflation decreasing recently, some central banks have already started cutting interest rates, and the Federal Reserve in the US is expected to follow suit in September. In response to the Fed’s rate cuts, the pressure on mortgage borrowers will ease, giving them the opportunity to renegotiate refinancing with banks to lower mortgage rates.