Why are home prices and rates simultaneously setting records?

Home prices have just surpassed their mid-2022 peak, according to the 20-City Case-Shiller Home Price Index.

I’ll repeat that: despite mortgage rates climbing from 3.0% to more than 7.5%, home prices have somehow climbed.

What is happening?

The increase in home prices is largely driven by shrinking supply. Higher rates have dissuaded some buyers, but home sellers are even more reluctant to sell. Thus, supply has fallen faster than demand, and prices went up. We can see that housing inventory is lower today than in September last year:

Much has been written on the internet about how homeowners don’t want to sell their homes in the current market, where they may lose their nice 3% interest rate and take on a new 7.5% interest rate. And that is certainly a major component of the decreased supply.

But I think there’s another factor at play here: homeowners since 2009 largely represent the wealthiest segment of American society. This population is reluctant to sell their home into a difficult market. They have the capital to sit on their home and wait for a better sellers market.

Prior to 2009, 75% of home buyers had a credit score below 760. After 2009, more than half of home buyers have credit scores above 760. And in the chaotic period of 2020-2022, nearly 70% of home buyers had credit scores above 760.

This is an enormous structural change in the housing market. Whereas in 2008 and earlier, homeowners largely represented the entire American economy, today homeowners are more regularly part of a smaller, wealthier segment.

While I can’t predict the future, I think these data suggest that home prices are unlikely to go through a 2008-style collapse in the near future. Wealthier owners are unlikely to behave in the way the subprime market segment did. They likely won’t sell their homes into a downward spiral.

For those that are looking to buy, I think the mortgage rates are far too high still. Fortunately, there are some signs that long-term rates could come down in the medium-term future. And if/when rates do fall, I would not expect home prices to fall dramatically.