Everyone keeps speculating and hoping that house prices soon will start to soften and begin to depreciate. We have for some time said that house prices are not expected overall to go down in the near future though there may be a few pockets where weakness will be observed. In fact, the Q3 2024 VeroFORECAST predicts that the average appreciation across all markets in the US will be +3.1% from Q3 2024 to Q3 2025.
The primary reason is because of the Federal Reserve’s policy of keeping the Federal Funds Effective Rate at nearly 0% from early 2020 until early 2022, mortgage interest rates were at historic lows as well during that timeframe dropping as low as 2.75%. Today this has resulted in over 60% of all home mortgages being at rates of less than 4%. Now that mortgage interest rates are significantly higher approaching 7%, these homeowners with once-in-a-lifetime low mortgage interest rates have become “locked-in” and are opting to stay put and not sell their homes. This has caused the number of homes for sale to be lower than normal, and this supply constraint is keeping prices elevated. With demand staying steady, when supply is significantly lower than historical norms, prices can do nothing other than stay elevated. That’s Economics 101.
Moreover, this lock-in effect is unlikely to go away anytime soon. It is analogous to investors sitting on a stock which has dramatically appreciated in price. As long as the stock isn’t sold, a long-term capital gains tax of up to 20% of the gain is never paid. Similarly with homeowners staying put with their 2.75% mortgage interest rate, as long as they don’t sell and move to another house requiring another mortgage, they never have to realize the much higher current mortgage rates. In effect, they are getting “free money” by staying put in their existing home … Much like capital gains are “free money” as long as they remain unrealized. That’s Investing 101.
