The Unyielding Climb: Why Home Prices Are Still Defying Gravity

Welcome back to HousingMarket Daily.

If you have been watching the tickers, reading the headlines, or—braver still—trying to buy a home in this climate, you are likely wrestling with one burning question. It is the question that dominates our inbox, our dinner table conversations, and every industry conference we attend.

Today, we are answering the big one: Why are home prices so high right now?

Conventional economic wisdom suggests that when interest rates rise, purchasing power falls, and asset prices should theoretically correct downward to meet buyers where they are. Yet, here we are, staring at near-record mortgage rates and near-record home prices simultaneously. It feels counterintuitive, perhaps even broken. But under the hood, the mechanics are functioning exactly as one might expect given the unprecedented constraints on the system.

To understand this resilience, we have to look beyond the mortgage rate headline and unpack the structural forces at play.

The single biggest driver of today’s high prices is a historic lack of inventory. To understand why, you have to look at the mortgage paper held by current homeowners. During the pandemic era (and the years preceding it), millions of Americans refinanced or purchased homes at historically low rates—often between 2% and 4%.

Today, with rates hovering significantly higher, those homeowners are financially disincentivized to sell. Trading a 3% rate for a 7% rate doesn't just mean a new house; it often means a monthly payment that is double or triple for the same amount of debt. This phenomenon is known as the "lock-in effect," and it has effectively frozen the resale market.

Federal Housing Finance Agency Working Paper on Mortgage Rate Lock-In. New research from the FHFA details how rising interest rates create a "lock-in" effect that significantly reduces the mobility of homeowners, estimating that for every percentage point increase in the rate differential, mobility decreases by huge margins. This reduction in mobility directly translates to fewer existing homes hitting the market.

Because existing homeowners aren't selling, the "move-up" buyer is missing, and the entry-level inventory they would normally leave behind isn't becoming available. We are left with a standoff: buyers can’t afford to buy, and sellers can’t afford to sell. When supply is this restricted, even dampened demand is enough to keep prices firm.

While the lock-in effect is a current financial problem, our housing shortage is also a physical one that has been compounding for over a decade. Following the 2008 financial crisis, homebuilding in the United States collapsed. Many builders went out of business, and those that survived became incredibly risk-averse, focusing largely on luxury apartments or high-end single-family homes rather than entry-level inventory.

We effectively underbuilt for ten straight years. Estimates vary, but most analysts agree we are millions of units short of where we need to be to house our population. Now that builders are ramping back up, they are facing their own headwinds: high costs for land, expensive borrowing rates for construction loans, and chronic labor shortages.

National Association of Realtors (NAR) Housing Shortage Analysis. NAR consistently tracks the "housing gap"—the difference between housing starts and household formations. Their data underscores that the U.S. is facing a deficit of millions of homes, a structural gap that cannot be closed quickly, ensuring that new inventory commands a premium.

This scarcity of new products means that builders have significant pricing power. Unlike existing homeowners who might negotiate, builders are often setting the floor for pricing in many markets, using incentives (like rate buydowns) to keep the value of homes high.

Price is a function of supply and demand. We have covered supply (it’s low), but demand remains surprisingly robust due to demographics. We are currently witnessing the prime home-buying years for the largest generation in American history: Millennials.

Millions of Millennials are reaching their early-to-mid 30s, the age where marriage, children, and household formation typically trigger a home purchase. This wave of biological and social demand doesn't stop just because rates are 7%. People still get married, have babies, and relocate for jobs. They are finding ways to buy, even if it means stretching their budgets to the absolute limit.

Simultaneously, Baby Boomers—who hold a massive amount of housing equity—are choosing to "age in place" rather than downsize, further restricting the supply of family-sized homes available for the younger generation.

Joint Center for Housing Studies of Harvard University: The State of the Nation's Housing. The JCHS annual report provides the definitive look at demographic trends, highlighting how the surge in Millennial household formation is colliding with a lack of inventory, creating fierce competition for the few homes available.

If mortgages are so expensive, who is buying? Increasingly, it’s people who don’t need a mortgage—or at least, not a large one. The percentage of all-cash buyers has reached highs not seen in nearly a decade.

This group includes investors, but also regular families flush with equity from a previous home sale, or younger buyers receiving "gifting" help from wealthy parents (the "Bank of Mom and Dad"). These buyers are less sensitive to interest rate spikes because they aren't financing 80% of the purchase price. Their presence in the market keeps competition alive and sets a price floor, preventing the widespread price corrections many analysts predicted.

Redfin Data Center: Share of Homes Bought With All Cash. Redfin's robust data center tracks monthly housing market trends, including the share of all-cash purchases. Their recent reports have shown cash buyers making up roughly one-third of the market in recent months, insulating a large chunk of transactions from the impact of rising mortgage rates.

So, why are prices so high? It isn't a conspiracy, and it isn't a bubble in the traditional 2008 sense. It is a fundamental imbalance. We have a generation of buyers desperate for homes colliding with a decade of underbuilding and a financial environment that discourages anyone from selling.

Until one of these levers moves—either a significant drop in rates releasing inventory, or a massive surge in new construction—prices are likely to remain sticky. The market isn't frozen because nobody wants to buy; it's frozen because the cost of moving is simply too high for the people holding the keys.

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