America’s Frozen Housing Market Is Warping the Economy
June 28, 2024 by High interest rates have unexpectedly driven up U.S. home prices instead of causing a decline, with the median home value reaching a record $419,300 in May, up from $270,000 pre-pandemic. This surge is due to the “lock-in” effect, where homeowners with ultracheap, fixed-rate mortgages below 4% are reluctant to move and face new rates near 7%, resulting in a tight housing supply and higher prices. Consequently, fewer homes are on the market, decreasing affordability for buyers, with only 37% of home listings accessible to a $100,000 income household, compared to the ideal 62%. This has reduced spending on home-related services, affecting real-estate professionals and new construction, which normally contribute 3% to 5% of U.S. output. Despite economic drag, those locked into low rates feel wealthier due to increased home equity, supporting consumer spending and complicating the Fed’s inflation control efforts. Labor mobility is also hindered as workers avoid moving to maintain low housing costs. Builders are reducing home sizes to keep prices down for first-time buyers, while large builders with lending arms benefit by subsidizing borrowing costs. Although rents for single-family homes rose, apartment rents remain stable due to oversupply. Mortgage rates need to drop to around 5% to normalize supply, but projections keep rates higher through 2025, meaning significant improvement in the housing market is unlikely soon.