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Why is the housing supply improving while interest rates are higher?

Interest rates are sky-high at the moment, prompting prospective buyers to delay purchases and fattening the housing market after a lean two years.

Update:
Housing supply increases with interest rate hike
Brendon ThorneGetty

For the first time since 2019, experts predict that the housing supply will begin to show a year-on-year increase in the coming weeks as more houses become available for sale in the United States.

New figures gathered by real estate listings website Realtor.com suggests that the US housing market may soon begin to grow. The data for April showed the smallest annual decline in the number of available properties since late 2019, a sign that the market is moving in the right direction for buyers.

It is thought that the high interest rates, which dictate the rate of interest on mortgages, have made expensive homes particularly expensive and may have spurred sellers into action. Throughout much of the pandemic people have been extremely reluctant to sell their homes due to the economic uncertainty and the logistical issues of navigating a property sale in the midst of covid-19 restrictions.

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Danielle Hale, Realtor.com’s chief economist, told CNBC: “April data suggests a positive turn of events is on the horizon for weary buyers: If the trends we’re seeing now hold true, we could potentially see year-over-year inventory growth within the next few weeks.”

Why does this affect the housing supply?

To combat the sky-high rate of inflation in recent months, interest rates have been raised across the board. The high rate of interest encourages consumers to save their money rather than buying immediately, thus lowering the demand for goods and services and reducing the price.

However in the housing market the effect has been a sharp increase in mortgage rates; the average rate on a 30-year fixed agreement has increased by 2.5 percentage points since the start of 2022. This has meant that properties are now staying on the market for longer, rather than being snapped up immediately. The high rate of interest on mortgages is discouraging buyers in the short term and giving the market a chance to recoup.

This effect can be seen in the rising cost of house prices over the past two years.

Since the start of the pandemic home prices in the US are up by around 34%, side-lining many prospective buyers. Realtor.com say that the average monthly payment on a $400,000 home with a 20% down payment is now $467 more than it was in March 2020.

The next shift in the housing market could be a crucial one as we are now in the most popular periods of the year for property purchases. Despite the resurgence in the housing supply, calculations from Black Knight suggest that homes are less affordable in 95% of US housing markets, when compared to their historical averages.

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