Here Are Three Reasons Why Home Prices Are So High
and why they’ll stay high for a while
You know things are bad when people talk about it on Reddit.
Last week, I went to Reddit to see for myself what people are saying about home prices. The number one reason I love Reddit is because people can express themselves freely.
On any other social platform, people know who you are, but on Reddit, you have an avatar. People take advantage of this anonymity and talk openly. Whenever I want unbiased information, I go there directly.
But this time I was blown away!
The amount of comments and votes on Reddit tells you that people are interested. As I scrolled through posts and comments, I could feel people’s pain and frustration, but I couldn’t pinpoint why home prices are still high and continue to rise.
As usual, I took the weekend to go on a discovery journey to find out the truth.
Here are three things I found.
#1 Shift in Preference After the Pandemic
The COVID-19 pandemic has largely subsided in most countries, but its effects are long-lasting.
I remember when the first restrictions were imposed, my initial thought was, “I’m so grateful to have a good, spacious apartment.” During the lockdown, we didn’t spend as much money on traveling and entertainment. The money we saved was instead funneled into home renovations.
If you work from home, a dedicated home office became a necessity. Like many of my friends, you probably spent a lot on building a home office, and let’s not forget the home gym equipment like a stair master for those breaks from work.
Beyond that, people invested their extra money into more extensive home renovations. Remember those days in lockdown when, out of sheer boredom, you decided to repaint the entire house?
Consequently, the value of homes increased, and now, people are asking for more money for the same properties.
But, another reason has had an even greater impact on this shift in preferences.
#2 Change In the Mortgage Market
The housing market is highly sensitive to fluctuations in interest rates. When the Federal Reserve (FED) increases interest rates, mortgage rates typically rise in tandem.
Between March 2022 and May 2024, the FED aggressively raised rates, bringing them to around 5.5%. Consequently, mortgage rates also surged, moving from below 3% to over 7%.
In 2020, mortgage payments accounted for about 14% of a family’s monthly income. By June 2023, this percentage nearly doubled to 29%, the highest level since 1985, according to the National Association of Realtors.
In the US, most mortgages are 30-year fixed-rate loans, meaning that the majority of homeowners are paying interest rates much lower than the current market rates.
Redfin News reports that “85% of homeowners with mortgages have a rate far below today’s level,” leading many to hold onto their properties rather than sell them.
To make things even more interesting, there is also a mental bias referred to as loss aversion that can also be added to the mix.
It relates to the tendency for individuals to prefer avoiding losses over acquiring gains.
This bias often results in the sunk cost fallacy, where people are reluctant to abandon investments they have made, such as home renovations or building new home offices.
With fewer people willing to sell their homes, the supply of available houses on the market decreases, raising the question: where will new homes come from?
#3 A Third of New Homes Are Newly Built
One-third of houses for sale are newly built, just shy of the record high, according to Redfin. Homebuilders now have more work than ever because many homeowners are unwilling to sell due to high mortgage rates.
This gives homebuilders a competitive advantage as they control 30% of the houses for sale, allowing them to influence home prices.
This situation also means that new home buyers have fewer options. A young couple might prefer a smaller home to save on costs and lower their mortgage payments. They might not have that choice.
Final Thought
If you are a first-time home buyer, you might be wondering what your best move is. Should you wait? Should you buy now, or should you continue renting?
That’s an interesting question, and I promise to address it in my next article. For now, I wanted to explain why home prices are so high and why they will likely remain high for a while.
Nikita
