Recently, the prices of houses in the United States soared and reached a new high as strong demand from buyers exceeded the limited supply of available properties. According to the S&P CoreLogic Case-Shiller National Home Price Index, the benchmark index of US residential real estate prices, which measures average home prices in major metropolitan areas throughout the country, increased 20.6% in March 2022 YoY, the highest annual rise since 1987.
Why are House Prices Rising?
House prices have increased as a result of record low interest rates, lack of availability of new homes, and unexpected increase in demand during the pandemic. The demand for houses increased initially due to exceptionally low mortgage rates combined with Fed’s accommodative monetary policy. While the supply of houses got affected due to the COVID-19 restrictions, lack of construction supplies and restrictions on work practices led to a reduction in the supply of new houses. The mismatch in demand and supply resulted in an increase in house prices.
Measures by the US Government
The housing market is most affected by interest rates. Hence, in order to control the rising inflation and dampen the increasing demand, the Federal Reserve increased the borrowing cost. It increased its key interest rate by a total of 75 basis points since March 2022, with additional hikes projected this year and next year. According to the US mortgage finance agency, Freddie Mac, the 30-year fixed mortgage rate increased above 5% in April 2022, recording the highest increase since February 2011.
Outlook for the Housing Sector in the US
The Federal Reserve’s strict monetary policy along with increasing mortgage rates and inflated prices of houses increased the borrowing cost and discouraged buyers from entering the housing market. According to the US Department of Commerce, the sales of new homes decreased 26.9% in April 2022 YoY and fell 16.6% over that in March 2022. Activity in the housing market slowed significantly in recent months. The slowdown will likely continue for some more time with the recent increase in mortgage rates and increase in housing prices, which may eventually lead to a reduction in the prices of houses.
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