Monday, August 7, 2023

I saw in the news recently how there isn’t much housing inventory available for homebuyers right now because people don’t want to sell and get rid of their sweetheart mortgage deals. Homeowners got a 2% mortgage during our prolonged period of 0% interest rates and now that interest rates have risen, getting a new house would be prohibitively expensive, even after taking their home equity into account.

When interest rates rose, so did the typical mortgage payment. Say you were looking at a $1,000 monthly mortgage payment and rates hikes made the payment $1,800 (for the same house). It might change the situation. If that scenario played out many times over, nobody would be able to afford a house and prices would drop.

But the opposite has occurred. Everyone is staying locked in their low-rate mortgages. It’s keeping inventory low. As a result, prices are high (and rising).

Amazingly, this will probably continue until interest rates decline. At that point there will probably be a flood of new houses for sale, which could make prices decline.

In other words, high interest rates have helped the housing market, while lower interest rates could hurt it. Anyone have that counterintuitive paradox on their bingo card?

It’s a pretty wild scenario. Everyone thought the housing market would crash, with recession at least partly to blame. Meanwhile, the opposite happened.