Median home selling price in the US rose 2.6 percent in March: Why do prices continue to increase?

Before the pandemic, the bottom fifty percent (or 61.5 million) of households, in terms of wealth, only owned around twelve percent of real estate in the United States. This figure is only slightly less than the top one percent of households that in early 2020 owned 14.5 percent.

However, during the pandemic, many households saw incomes rise, and with the explosion of remote work, many families relocated. And by late 2022, the percentage of real estate owned by the bottom fifty percent of households had increased to 13.4.

Homes prices keep pushing up

From March to April, the median price of a home sold in the United States increased by 2.6 percent.

A year ago, the Federal Reserve began to push up interest rates in an effort to temper inflationary pressure in the economy. These rate hikes continue to have a direct impact on mortgage rates which for both 30-and-15-year loans are higher than they have been in decades.

Housing continues to be a major driver of inflation, with the Bureau of Labor Statistics saying the sector was responsible for seventy percent of the 0.4 percent increase in the Consumer Price Index picked up in February.

Why aren’t home prices falling?

By increasing interest rates, many economists, including those at the Federal Reserve, assumed the cost of purchasing a house would rise to a level that would price some buyers out of the market. If supply remained constant or increased, and demand began to fall, prices would fall. A year later, average and median selling prices have barely moved, which indicates that there are other variables to consider aside from interest rates impacting the market.

Supply remains tight

The first has to do with the supply of houses on the market, which interest rates do not impact as directly as demand. The US Census Bureau reported that at the end of March, 432,000 homes remained on the market. While higher than the 411,000 recorded a year ago, this rate has been falling quickly, which could be inflating prices; even if fewer buyers remain in the market if the supply continues to drop, prices will rise.

Looking into the future, the fact that higher interest rates make the construction of new housing projects more expensive could further cut down supply. Compared to March 2021, building permits for new housing units had fallen by 24.8 percent to 1,413,000. The situation for single-family units was even more concerning, with permits falling by nearly thirty percent.

Cash is king in this market

Buyers who are able to pay cash are at a serious advantage in this highly competitive market.

In late 2019 before the pandemic’s impact began to be felt in the United States, eight-thousand homes were purchased in cash between October and December. During the last three months of 2022, this figure was fifteen thousand—a fifty percent increase. Cash purchases had historically represented around six percent of all home sales, but in 2022, they accounted for close to one in ten. This figure began to trend down towards the end of the year, but the total number of houses purchased in cash remains higher than their pre-pandemic levels.

Cash buyers, some of which include investment firms on Wall Street, do not need a mortgage, meaning their consumption habits are unlikely to be influenced by interest rate hikes from the Fed. This group is in the best position when confronted with higher rates because as some buyers are priced out of the market and prices fall, they are able to acquire more property at a cheaper rate while still keeping the price of their assets artificially high.

The role of investors

Pew reported that in 2021, investors purchased a third of all houses sold in Georgia and thirty-one percent of homes in Arizona. Nevada (30 percent), California, and Texas (29 percent) also saw a major investor presence in the housing market. Investors, unlike families and individuals who plan to live in the house, aim to turn a profit on their purchase.

All of these states saw a sharp decline in the number of homes on the market after 2020, which began to rise again when interest rates began to tick up. However, over the last year, all besides Texas have seen this trend reverse.