Housing Market Decoded: Why are home prices still rising? 

Decisions in residential real estate are often based on market data — sometimes conflicting, often confusing. Housing Market Decoded, authored by economists and other market experts, helps put the data in context so you can make sense of the numbers.

Mortgage rates and home prices seem to be stuck at elevated levels. While consumers don't have any control over rates, one might think that prices would drop as more potential buyers find themselves priced out of a home. But so far, that hasn't been the case.

The numbers

According to Freddie Mac, the average rate on a 30-year fixed rate mortgage has been around 7% since February, topping out at 7.22% during the first week of May and settling just below the 7% mark in July. Rates are about 400 basis points higher than they were in 2021.

Home prices nationally continue to rise. The National Association of Realtors reported that the median price of an existing home in the U.S. was $419,300 in May, up nearly 6% from a year ago. The S&P CoreLogic-Case Shiller Index showed prices up 6.3% in April. In many markets across the U.S., home prices have hit record highs this summer.

Higher mortgage rates make buying a home more expensive. In July 2021, for example, when average rates were 2.88%, the typical monthly payment on a $400,000 home was about $2,000. At an interest rate of 7%, the monthly payment on a $400,000 home is now almost $3,000.

But even as higher rates are driving up homebuyers' monthly costs, home prices continue to rise.

The explanation

Since high mortgage rates make the cost of buying a home go up, shouldn't home prices come down (or at least not increase as quickly) with rates persistently stuck near 7%?

Well, the relationship between mortgage rates and home prices is not as clear cut. Over the past four decades, there have been times when both mortgage rates and home prices were declining (1991, 2008-2011). We've also had years when mortgage rates were low and home prices were rising (2003, 2012). Overall, between 1988 and 2024, the correlation between average rates on a 30-year fixed rate mortgage and home price appreciation, while negative, is weak (-0.12).

Since 2021, we have been in an extended period when both mortgage rates and home prices (generally) have been rising. With housing affordability worse than it has been in 40 years, expectations were that high home prices and elevated mortgage rates would eventually lead to slower home price appreciation, or even price drops. But, so far, that has not happened in most places.

And that's because these other factors — aside from the cost of borrowing — are keeping home prices high and rising in most markets:

Big gains in housing equity. U.S. mortgage holders saw near-record levels of home equity in the first quarter of 2024. Nearly 40% of U.S. homeowners do not have a mortgage at all, owning their home outright. Repeat homebuyers have been able to leverage the equity in their existing homes, putting it toward their next home purchase which allows them, in essence, to buy down their mortgage rate. Record levels of housing equity make some buyers less interest rate sensitive, allowing them to purchase at a higher price.

Very low supply. Inventory has been increasing over the past few months, but even with these gains, overall supply is still low. Nationally, at the end of May, there was just 3.7 months of supply. But the supply picture is much tighter in some local markets, where homebuyers are still finding less than a month's supply of inventory available. Tight inventory is keeping upward pressure on home prices in these markets.

Positive financial picture for households. The labor market is still strong, the unemployment rate is low, and wages continue to rise. While consumer confidence has dipped in recent months, for the past few years, Americans have generally felt upbeat about their own personal financial situations. When people feel good about their finances, they are more likely to spend, including on homeownership.

Ironically, perhaps, it's likely that home prices will begin to come down just as mortgage rates start declining. In the second half of the year, there will be more supply, coupled with a pull-back in personal savings, which should lead to a slowdown in home price appreciation.

There is no reason to expect major home price corrections in most markets, and affordability will still be a concern. But lower rates and less rapid price growth will bring some relief for homebuyers.

Dr. Lisa Sturtevant has been involved in research on economic, demographic and housing market issues for more than 20 years. She is currently Chief Economist at Bright MLS, where she leads research and forecast activities for Bright and serves as a thought leader on the housing market. The views expressed in this column are solely those of the author.