The U.S. housing market distorts a fundamental principle of economics: supply and demand.
Home prices hit record highs in May, even as sales of existing homes fell and the supply of homes for sale surged.
“It’s a real headache,” said economist David Rosenberg.
The American real estate market has officially entered a bizarre world.
The law of supply and demand is a basic principle of any free market, and right now it is being turned upside down by strange events in the real estate market.
The supply of homes for sale is increasing while demand is decreasing. And yet, real estate prices continue to reach record highs.
“When it comes to the housing market, the laws of supply and demand no longer seem to apply,” economist David Rosenberg said in a note this week.
Existing home sales fell to a four-month low in May to 4.11 million units, down 2.8% year-over-year, while existing homes available for sale increased climbed 18.5% year-on-year in May.
“Unsold inventory increased from 2.9 months of supply in February to 3.2 months in March, then to 3.5 months in April and 3.7 months in May, the highest level since June 2020,” said Mr. Rosenberg.
Yet despite the drop in demand measured by lower existing home sales and increased supply, the median home price jumped 5.8% year over year to a record $419,300 in May.
“It’s a real headache. Demand is at a four-month low, supply is at a four-year high and prices are at record levels,” Rosenberg said.
Part of the divergence is that real estate is a very regional and localized market, with some areas stronger than others. Texas and Florida, for example, saw property prices fall due to an increase in the supply of homes for sale.
The other part of the equation is mortgage rates, which are at multi-decade highs around 7%, which has put many potential buyers out of business and blocked potential sellers who don’t want to. not refinance their next real estate purchase at higher rates, which has the effect of freezing the market.
But the dynamics of falling demand, rising supply and rising property prices cannot last forever.
“At some point, something has to collapse – either interest rates or prices,” Rosenberg said.
Some market experts believe that property prices are about to fall significantly.
Market strategist Chris Vermeulen pointed to a plateau in homebuilder activity as reason to believe that The real estate market could experience a sharp decline.
“The reality is that I think we are going to see this collapse,” Vermeulen said.
Others, however, expect home prices to continue rising once the Federal Reserve cuts interest rates. Markets expect the central bank to make the first cut at its September policy meeting, the report said. CME FedWatch Tool.
Lower mortgage rates would help ease borrowing costs, but would also boost demand as more borrowers rush into the market.
Famed investor Barbara Corcoran said lower mortgage rates will drive real estate prices even higher.
“As soon as real interest rates drop one more percentage point, everyone will jump into the market and you’ll pay a lot more for your home,” Corcoran said.
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