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The housing market continues to be at the forefront of economic conversations. Prospective homebuyers are frustrated. Sellers are watching their homes fly off the market within days. It is a perplexing time in housing – supply is stubbornly low, demand is very high, and interest rates are rising.

To fully grasp how the housing market got to this point, it’s important to understand the various factors that impact this sector of the economy:

  • Economic conditions (GDP growth, inflation, job market trends) play a significant role. A strong economy with low unemployment rates and wage growth generally leads to increased demand for housing. An economic downturn tends to have the opposite effect. If people feel good about where they stand financially, the housing market picks up pace. If they feel less financially sound, the real estate market will likely take a hit.
  • Supply and demand are big drivers of housing market trends. Not enough marketable homes? Home prices rise. Increased inventory and dampened demand? Real estate prices fall.
  • Government policies (tax incentives, mortgage regulations, housing subsidies) can influence the housing market. Changes in mortgage rates or lending standards can impact affordability, while tax incentives for homebuyers or real estate investors can affect demand.
  • Demographic shifts (changes in population size, age distribution, household formation trends) contribute to housing market movements. For example, as millennials enter their prime homebuying years and baby boomers decide to downsize, the demand for certain types of housing and specific locations may shift.

The current state of the housing market.

Despite the potential headwinds of a rising rate environment and tighter lending, the housing market keeps chugging along. While interest rates are significantly higher, having doubled from all-time lows, they are still considered relatively low compared to rates in the past.

A huge driver of continued demand is the fact that there are simply not enough homes on the market. The pool of listings remains small, with the few available homes changing hands at a rapid pace.

Remember all those refis a few years ago? A sizeable portion of homeowners locked in record low interest rates on their mortgage loans. Those same homeowners are now quite hesitant to move. It is hard to justify buying into an interest rate on a new home that is twice as high as the rate on their current one. Many homeowners have fixed rate mortgages at under 3%. Current mortgage rates are in the 6-7% range.

Predictions for the future.

With the current murkiness in economic forecasting, it is difficult to predict where we are headed with the housing market. It will likely continue to face challenges with affordability, given rising interest rates and tight lending. People will keep being priced out of the market, particularly the younger generations with limited means to buy at a premium.

Overall demand for housing is expected to remain strong, driven by pent-up need and demographic shifts. The pressure for additional inventory in the market is pushing the needle on new construction, and new home builders are beginning to ramp up production. Additional new homes could help to ease the supply-demand imbalance, but it will be a slow process.

Until more housing supply is made available, finding an ideal home at an affordable price is likely to be a trying endeavor.