Why Home Prices Aren't Dropping
Many buyers may be on the sidelines waiting for home prices to drop. Not only have interest rates probably peaked, but home prices did not see significant declines while interest rates were rising. As home prices continue to hold steady and in some cases increase, the market can only go up.
During the real estate market frenzy of 2021, home prices rose a whopping 16.9% from 2020. In the early part of 2022, home prices rose 10.2%. While the sale numbers have continued to decline, home prices have held steady, which has been confusing to many buyers.
The FED began raising interest rates to stall runaway inflation, which had reached 7% in 2021, a 40-year high. When you compare that number to the annual inflation rate of only 1.4% in 2020, it is easy to see why they implemented that tactic to reduce inflation.
The rate-hiking campaign began in March of 2022 and sales activity in the housing market stalled. As mortgage rates rose above 5% and are now above 7%, predictably, some markets have had reductions in home prices. However, there are other factors at play that have allowed home prices to continue to climb.
Each time the FED raises rates, mortgage rates rise too. Traditionally, higher interest rates coincide with price corrections. In the current real estate market however, a lack of inventory is affecting home values. While it is true that there are less buyers looking at available homes for sale, a reduction in inventory means that the supply and demand factor hasn’t changed.
According to the National Association of Realtors, year-over-year median prices were down 3.1% from 2022 to 2023. Over the summer however, median home prices began to go up on average of 3.5% each month.
Like any market, lenders had to stay competitive when mortgage originations declined. In some cases, their rate hikes did not match to the FED rate hikes, which enticed more buyer activity. Additionally, many sellers holding loans with lower interest rates chose not to list their homes for sale. This further reduced the number of available homes for sale.
In the luxury markets of Lake Tahoe, many home purchases are all cash. The luxury real estate market tends to reflect what is happening in the stock market. Many purchases are from stock sales and the stock market has been strong in 2023.
According to an article in Forbes, analysts had predicted that the S&P 500 earnings would rebound into positive territory during the 2nd half of 2023. They also predicted year-over-year growth of 0.2% in the 3rd quarter and another 7.6% in the 4th quarter of 2023.
While inflation is still above the FED’s 2% target, many economists are predicting that they will not raise the rate in their September meeting. If they do, they believe it will be the last one as the FED grapples against creating a recession.
It is important to remember that during the pandemic, the FED slashed rates to near zero in an effort to stimulate the economy. The days of 3% and 4% interest rates are probably something of the past. Buyers are growing more comfortable with mortgage rates in the 6% range. When more buyers move back into the market, it can only mean that prices will rise.
Contact me today for more information about the luxury real estate market in Lake Tahoe and the Bay Area of California.
