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Housing market: The reason why home prices are rising again in 2023

Home prices have been on the rise since January. What is driving the market up as interest rates remain at record highs?

Rising mortgage rates and overvalued homes are pushing potential buyers out of the market. The lower demand in some cities is causing prices to drop.

The National Association of Realtors (NAR) reported that while the median price of homes sold remained lower than the level recorded a year earlier, prices are increasing. The median reached $388,000 in April, rising from $361,000 since January.

According to the chart displayed above, the Federal Reserve initiated a hike in interest rates which led to a decline in housing prices. However, the current year has seen a reversal of these trends despite the rates remaining high. During the pandemic, there was a rapid surge in housing prices as household income and savings increased, thus attracting new buyers. By raising interest rates, the Fed is making mortgages more expensive, resulting in a decrease in the number of buyers in the market. Interestingly, only those buyers who can afford to purchase in cash or obtain alternate financing will remain in the market, as those who can’t afford a mortgage are priced out.

The impact of rate hikes on first time home buyers

In 2022, the percentage of homes purchased by first-time homebuyers fell to twenty-six percent in 2022 —the lowest level ever recorded by the NAR. Rate hikes pushed this figure down from a third of all borrowers. First-time home buyers tend to be younger, and the NAR estimates that around thirty-seven percent have student loans.

As first-time homebuyers who could no longer afford a mortgage with rates so high, the buyers left in the market are not as impacted by the Fed’s move to increase rates. The housing sector has now become a major driver of inflation, and if the Fed is unable to impact demand in that sector through changes in interest rates, prices could continue to rise. This thesis is bolstered by the fact that the percentage of buyers purchasing in cash rose to twenty-eight percent from twenty-six percent in April 2022.

To lower prices, either demand must be decreased further, or the market’s supply must increase. Joseph Stiglitz, a Nobel Prize-winning economist, has noted that the high internet rates make it challenging to attract the needed investment to increase supply (i.e., new construction). These trends suggest that interest rates may not achieve the intended goal of lowering prices in the housing sector and may instead keep them elevated for an extended period.


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