Interest Rates, Is This Time Different?

The U.S. housing market took a sharp turn in 2023 as the Federal Reserve aggressively raised interest rates to combat inflation. This led to a cooling in the housing market as higher borrowing costs began to weigh on buyers.

Key Trends in 2023:

• Rising Interest Rates: In response to inflationary pressures, the Federal Reserve implemented a series of interest rate hikes throughout 2022 and into 2023. By mid-2023, the average 30-year fixed mortgage rate had risen to above 7%, drastically reducing buyers’ purchasing power.
• Decreased Buyer Demand: Higher mortgage rates meant higher monthly payments for new buyers, leading many to postpone their home purchases or lower their budget expectations. As a result, the previously red-hot housing market cooled considerably.
• Stabilizing Home Prices: While home prices remained high, the rate of appreciation slowed. In some markets, prices began to level off or even decrease slightly, particularly in areas that had seen the most significant price spikes in 2021 and 2022.

The Market Still Maintained a Seller’s Market:

• No Negotiation Power for Buyers: As the demand for homes retracted, paradoxically so did the supply for homes even more so. The reason for this is actually quite understandable. When a homeowner decides to sell their home, often they are also in the market as buyers. Whether their reason is to sell because they are relocating or simply just downsizing, often the sale of their home is paired with another purchase elsewhere. With the extremely low interest rate environment of 2020-2021, this created an environment in which 80% of the mortgages currently held in the US were lent at around a 3% interest rate. This was due to the refinancing frenzy post-COVID, when most homeowners took the opportunity to refinance at historically low rates. So we saw an extremely rare time in which supply contracted faster than the buy-side demand cooled off. This created an environment where buyers still had little to no negotiating power and often were competing in multiple offer situations.
• Decreased Housing Inventory: Inventory levels were very low compared to historical norms, many homeowners did not want to give up their 2-3% interest rate they were paying with their current mortgage and swap it with a new purchase with a mortgage rate over 7%. Additionally in almost every region in the US the home prices have appreciated so much that in many cases sellers found themselves doing the math and found that if they would sell their home now, they would end up paying a lot more per month on their mortgage for their new house, even in situations where they were downsizing. The proposition to sell now, and pay a lot more for less house did not appeal to most homeowners so they simply made the decision that this is not the time to sell.