January 15, 2024

Higher interest rates have essentially stalled out the U.S. housing market. It could greatly damage the economy.

Even after falling from a multi-decade high of 8.5% in October, the average 30-year fixed mortgage rate remains greater than 7.0%. And considering that housing prices are still sky high, it’s nearly impossible for folks to buy a home.

Leading up to the pandemic, the average sales price for a U.S. home was $383,000, according to the U.S. Census and Department of Housing and Urban Development. It grew to $553,000 in the fourth quarter of 2022 (it’s now about $513,000).

So, folks are struggling to buy homes. Well, nobody wants to sell them either.

From 2010 to early 2022, mortgage rates averaged less than 4.0%, per Freddie Mac. People had more than a decade to lock in a low mortgage rate. They did: nearly 70.0% of mortgaged U.S. homeowners have an interest rate less than 4.0% today. On the flip side, only 2.5% are paying the current mortgage rate or more.

This combination of hesitant buyers and a lack of sellers is drying up the existing home market.

In October 2023, existing home sales slowed to 3.79 million, their lowest level since 2010 and down 14.6% from the year prior. Unfortunately, things don’t seem likely to change anytime soon, as evidenced by pending home sales recently dropping to a 20-year low.

A deteriorating real estate market will make consumers less financially secure and thus likely to spend less. Folks spending less hurts businesses, which then causes unemployment to rise. Then before you know it, we’re in a recession. It certainly seems plausible.