Why are home prices rising with higher mortgage rates?

Why are home prices still rising even as mortgage rates have gone higher? A number of people predicted that home prices would experience a steep drop as mortgage rates rose, but that’s not what has happened.

This is not a new idea — I’ve been dealing with people predicting a housing crash since 2012. Doom porn is trendy in America and it’s usually done by people who hate the Federal Reserve. But today, I’ll use data to explain why, even in 2024 — the third calendar year of the lowest home sales ever (adjusting to the workforce) — national home prices have not crashed. 

Here are the reasons given why home prices would supposedly crash over the past 13 years:

2012 – Shadow inventory

2013 – Higher mortgage rates

2014- QE ending in October

2015 – Manufacturing recession

2016 – Home prices got back to the bubble high

2017 – No good reason

2018 – 5% mortgage rates (Start of the bubble crash for sure)

2019 – Home-price growth was cooling off

2020 – COVID-19

2021 – Mortgage forbearance

2022 – 7% mortgage rates

2023 – Historically low housing demand

2024 – Higher mortgage rates, higher inventory, sexless men, silver tsunami, credit card debt — take your pick, it’s all rookie ball

Ladies and gentlemen, these are not housing experts or housing analysts. I have a rule: don’t listen to anyone on the internet unless they show their name, face, a written 2024 price forecast and a working model. 

So, why haven’t home prices still so high this year?

Well, if history is our guide, it’s rare for home prices to fall in general since 1942. If you take 2007-2011 out of the equation, we have had only one year go negative; that was 1990, and that was only a 1% decline.

When you ask the housing crash addicts why their home-price forecasts don’t work, they usually say we should adjust home prices to inflation, gold prices or some other silly historical reference that doesn’t apply to modern-day economics. This group is simply a cult and their X accounts have been wrong for the last 13 years.

Let’s look at today’s existing home sales report to see if it can give us any clues on why home prices haven’t crashed year over year. To get a real price crash, we would need to see a surge of housing inventory and distressed sellers. As you will see below, inventory is growing, but it’s been a calm, healthy rise in 2024, not a flood of houses coming onto the market.

The National Association of Realtors‘ existing home sales report shows home sales dropped only 1.0% from August to a seasonally adjusted annual rate of 3.84 million in September. Year-over-year, sales are down 3.5%.

“Home sales have been essentially stuck at around a four-million-unit pace for the past 12 months, but factors usually associated with higher home sales are developing,” said NAR Chief Economist Lawrence Yun. “There are more inventory choices for consumers, lower mortgage rates than a year ago and continued job additions to the economy. Perhaps, some consumers are hesitating about moving forward with a major expenditure like purchasing a home before the upcoming election.”

Where I disagree with Yun is this: we have more inventory because demand has been softer and we have more new listings this year versus last. If mortgage rates had trended below 5.75%-6.25% this year, we would be growing home sales regardless of the inventory data. Inventory is growing and home price growth is cooling down from the savagely unhealthy housing market of 2021 and early 2022, but it is not enough to crash home prices nationally.

Below are charts from today’s report. Note: Median sales price data is seasonal. Many people will try to trick you by saying home prices are declining in the second half of the year, but this is just normal seasonal price declines.

Using the NAR data, a normal amount of active inventory since 1982 has been between 2-2.5 million. In 2007, active inventory spiked to 4 million. Today, it’s only at 1.39 million. With a monthly supply of homes at over four months and getting closer to my target of 1.52-1.93 million for active inventory, the housing market is balanced. We have some supply to buy homes — we lack demand because mortgage rates are too high.

Ok, but you could ask: If prices follow volume, why haven’t national home prices seen a steep decline? Well, you would need to add distressed sellers into the mix, as we saw from 2007-2011, and we simply don’t have that in the data now.

Foreclosure levels are historically low

As you can see below, foreclosure and bankruptcy data rose between 2005-2008, all before the job loss recession started. Today, we aren’t even back to pre-COVID-19 levels of foreclosures.

No major forced selling happening

Below is our data on new listings, which shows that 2023 and 2024 will be the lowest new listing periods ever in history. This data has been trending between 30,000 and 90,000 per week for the past five years. Compare that to the period of 2009 to 2011 when this data line ran at 250,000 to 400,000 per week. That’s a big difference, folks. The only time in over 80 years where national home prices crashed was when new listings data was running three times higher than what we’ve seen in the past few years.

Tons of equity this time around

We don’t have a lot of people selling their homes because today we have the lowest percentage of homes underwater at 1.7%. In addition, the loan-to-value of homes with a mortgage is under 50% and over 40% of homes in America don’t even have a mortgage. In 2010, when the new listings data was exploding, over 23% of homes in America were underwater.

I want to keep things very simple: We had one period where national home prices crashed and to replicate that model, you will need to have some similar variables, mainly distressed sellers or people forced to sell into a declining marketplace. Some people believed rising mortgage rates over the last two years would automatically mean home prices would crash. History disagrees with this assertion. The data has shown us for decades that we have periods in history where we have had both rising mortgage rates and inventory without home prices crashing. 

As we can see in today’s existing home sales report, home sales have declined but they are not crashing. I discussed this on the HousingWire Daily podcast last year explaining my housing economic model. For a national home-price crash to happen, you need a terrible economy, major distressed sellers and no help from the government in assisting American citizens, which means you need a repeat of the Great Recession of 2008. The data above shows that isn’t the case today.