Here's How Interest Rates are Going to Impact Homeownership Costs in the US
Despite rising interest rates, demand for housing in the US has remained high and this has led to a further surge in home prices. This is surprising since the demand for new units goes down when interest rates go up, and the trend isn't helping at a time when affordable housing is out of reach.
Skyrocketing home prices have led to record $32.6 trillion in US housing market equity, up 81% in the past 5 years. Debt as a % of housing market value has decreased over this time from 36% to 28%. In 2012 when US home prices bottomed there was more debt in housing than equity. pic.twitter.com/La8Io4aunw
— Charlie Bilello (@charliebilello) March 28, 2024
In February the prices for the houses were almost 5% higher compared to the prices around the same time last year. The interest rate in February was around 7% which was 1% lower than the interest rates in October last year, when it touched an all-time high of 8%. Home buyers are more interested in newly built homes as it is evident that 6% more newly built homes were sold this year in February as compared to February of 2023. On the other hand, the sales of existing homes have been down by 7% as compared to last year's February.
Existing homeowners are not moving to new houses
The supply of houses in February is more than the last sprint but still, the number of houses available is just 60% of the availability in the pre-pandemic era. Rising prices are a major factor preventing people from vacating their current houses in favor of better accommodation. In 2022, if someone wanted to move to a new house that would cost 25% more than the price of the existing house, the monthly payment would increase by merely $400. But in 2024, if someone wants to make a similar move, they would have to shell out $1800 more than their existing payments. Even if someone wants to shift to a house with the same price tag, their monthly payments would increase by 60%.
This is a 🧵on the most expensive housing markets in the US right now based on current home price data, interest rates, and the prevailing wage in these states.
— Jacob Larsen 🇺🇸 🇩🇰 🇺🇦 (@SLCPaladin) April 2, 2024
Here are the 5 most unaffordable housing markets:
1) California
2) Hawaii
3) Montana
4) Colorado
5) Utah
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Housing market dynamics
There are plenty of factors that affect the supply and demand dynamics of the housing market and can make the market favorable for new house buyers. This includes lowering interest rates to make payments easier. If the financial institutions lower the interest rate on home loans to 6%, then shifting to a house that is 25% costlier than the existing one would cost 88% more, while the same move would be 132% more expensive at a 7% rate. Existing property owners picked up loans at rates that were significantly lower. Around 88.5% of the people who purchased houses on mortgage earlier, got it at interest rates below 6%. Some of them were even fortunate enough to secure properties at an interest rate of 3% or 4%.
The prices for houses in the United States are rising at a quick pace, and this makes it challenging for home buyers to purchase a new property. In some states such as California, buyers are discouraged from even thinking about making a move. Apart from that, there are more than 550 cities in the United States where the cost of buying a house is more than $1 million. These high prices combined with high interest rates have led to a decrease in demand.