Americans Hit With Rising Home Prices as Mortgage Rates Fall

Mortgage rates, which have declined markedly since they hit their two-decade peak in October, have contributed to a rise in demand for homes, which in turn has helped push up prices, Freddie Mac said.

In October, interest on home loans soared to 8 percent, the highest level since the turn of the century, which scared away potential buyers and kept sellers of used homes locked into their low-rates homes unwilling to incur the elevated mortgage rates the market was offering, stifling supply in the process.

Rates have dropped to their lowest level since June 2022 recently and are now hovering in the mid-6 percent range. The decline in rates has opened up demand, which experts say is elevating prices, partly because of the low inventory of homes available for buyers.

"Mortgage rates have not moved materially over the last three weeks and remain in the mid-six percent range, which has marginally increased homebuyer demand," Sam Khater, Freddie Mac's chief economist, said in a statement. "Even this slight uptick in demand, combined with inventory that remains tight, continues to cause prices to rise faster than incomes, meaning affordability remains a major headwind for buyers."

Analysts point out that demand has ticked up over the last few weeks, as shown by improved listings in the market. Newly listed homes were up 9 percent in December compared to last year, and homes are spending less time on the market, according to realtor.com, suggesting that buyers were prepared to take the plunge into buying.

Prices have continued to stay elevated, according to analysts. The median sale price for a home in America at the start of the year is a little over $363,000, which is more than 4 percent higher than it was at the same time last year. This is near to the largest jump since October 2022, according to Redfin.

Realtor.com suggested that while the median list price is a little more than 1 percent relative to last year, prices have stabilized, giving buyers an opening. But lack of enough homes in the market will likely keep prices high, it said.

"Listing prices have been buoyed by scarce inventory and, while new home sales have been increasing, construction activity isn't elevated enough to fully bridge the low inventory gap," realtor.com analysts said this week.

Going forward, the path for mortgage rates will be choppy as uncertain economic conditions suggest that it may be some time before the Federal Reserve begins cutting its funds rate, which could lead to a decline in mortgage rates.

Central Bank policymakers hiked rates to a two-decade high to battle soaring inflation. That fight is yet to be won, underscored by the acceleration of the consumer price index in December to 3.4 percent from the previous month's 3.1 percent.

The 30-year fixed rate as of January 11 ticked up slightly to 6.66 percent from the previous week's 6.62 percent.

"The path forward may see fluctuations as we observed in the beginning of the new year, considering the uneven improvement in inflation," Jiayi Xu, an economist at realtor.com, said in a note. "Nevertheless, as long as the economy continues to see progress on inflation, the general expectation is for mortgage rates to continue their downward trajectory."

If inflation trends downward, it could spark a drop in rates, which could lead to more listings.

"Nevertheless, considering that the pace of decline for mortgage rates is likely to be slower compared to the end of 2023 given the expected volatility ahead, there is a potential for a slower-than-expected growth in listing activities," Xu said.