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Higher Interest Rates Did Not Slow Housing Appreciation; WHY?

Higher Interest Rates Did Not Slow Housing Appreciation; WHY?When MTV was launched in August of 1981, the first video they played was Video Killed The Radio Star.

I remember the excitement too, sitting there in my Levi’s 501s and wondering what I was going to do with my record collection, my Sony Walkman, and my Pioneer stereo with giant speakers.

But alas, my concerns were overblown because not only did video NOT kill the radio star, it enhanced it – much to everyone’s surprise!

MTV turned out to be a huge boon for the music industry in general – launching the careers of artists like Michael Jackson, Cyndi Lauper and Madonna.

And that increased interest in music only made radio that much more popular (until the internet actually killed the radio star).

This is of course another example of where the experts were wrong and of where a perceived competitive threat turned out to be an enhancement.

High Rates Did Not Kill The Housing Star

I share the above story about MTV killing radio because there has always been a similar consensus that sharply higher rates would kill off the housing boom.

But – so far – not so much.

This excellent report from Realtor.com explains just how hot the housing market remains. Here is an excerpt: “The median national home price for active listings grew to a new all-time high of $392,000 in February as prices rose faster than typical this time of year. This is $7,000 more than the seasonal high last July, and represents an annual growth rate of 12.9%. The median listing price per square foot increased by 14.3% year-over-year in February, and the median listing price for a typical 2,000 square-foot single family home rose 20.2% compared to last year.”

This surge in prices continues despite the fact that rates have climbed significantly – and will likely continue to climb at least in the near term.

So, the question is, why do prices continue to surge in the face of higher rates?

Two Reasons: (1) High demand because of demographics; and (2) Low inventory.

Demographic demand, or the number of homebuyers hitting peak homebuying age, plays a much bigger role in the housing market than most people realize. Those numbers bottomed out in 2008, greatly exacerbating the financial crisis, but they are peaking now – helping to keep the housing market propped up despite higher rates.

The other factor of course is inventory. Zillow recently reported that February’s inventory levels were down 25% from February of 2021 and 48% from February of 2020!

If rates continue to climb, we could see the impact on affordability affect both demand and appreciation.

But right now, the supply and demand factors, aside from affordability, are greatly outweighing any effects that higher rates might be having.

And, given that the Fed cannot allow rates to go up that much more (because the world cannot afford it), I expect the housing star to continue to shine brightly.

Jay Voorhees
Founder/Broker | JVM Lending
(855) 855-4491 | DRE# 1197176, NMLS# 310167