Housing Market Cooling Down Due to High-Interest Rates

Posted by Matin Varshochi in HousingJune 3, 2022(Last Updated July 29, 2022)3 min read
Key Takeaways
  • Since the beginning of the COVID-19 pandemic, the housing market has continued to rise in value, although the economy has been in a recession.
  • During the pandemic, two main factors allowed house prices to rise significantly, fixed short-term supply of houses and high inflation rates.
  • With the poor condition of the housing market, the government put measures in place to help reduce the surge in prices, and these implementations are showing signs of promise for buyers.
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Since the COVID-19 pandemic, the housing market has continued to rise in value, although the economy has been in a recession. With the fear and uncertainty of the pandemic, many began purchasing homes, ultimately raising the average house price. As these prices continued to rise, some found themselves in a situation where they could no longer afford to buy a home and were forced to rent instead. 


However, with the median rent price expected to exceed $2,000 by the end of summer, a fraction of people are in a situation where they cannot afford to purchase or rent a home. As a result, the federal government stepped in and implemented measures that are expected to cool down the housing market and potentially result in price drops. 


Factors Causing Home Prices to Surge


Fixed Short-Term Supply of Houses


During the peak of the COVID-19 pandemic, many companies suspended their operations, especially those which involved physical contact, such as construction. When these construction companies could not build more facilities, such as homes for sale, the demand for buying a home surged as the supply became fixed for the foreseeable future. 

The fixed supply resulted in bidding wars over existing homes, which ultimately raised the average price and benefited the home seller as they received a higher offer.  Also, as mortgage rates were low, many homeowners felt that it was the right time to receive a loan and buy a home. 

High Inflation Rate

Furthermore, as many people were out of work, the federal government decided to implement COVID relief packages to prevent a crash. Unfortunately, although this injection of money helped stimulate the economy, it also led to the inflation rate reaching its highest level since 1990. So naturally, the higher inflation rate made the year-over-year prices of homes increase at a higher rate.

Main Factors of Housing Market Cool Down

Higher Interest Rates

When the federal government intervened with relief packages to fight against the COVID-19 pandemic and reduce the risk of a market crash, it caused higher inflation rates. Consequently, to combat this issue that had risen, the Federal Reserve raised interest rates by half a point. Unfortunately, the higher interest rates meant that monthly mortgage payments would be higher, discouraging some aspiring homeowners from purchasing a home in the current market. 

Fortunately, this integration has begun working, as fewer people are looking into purchasing homes. With the higher interest rates causing less demand, more people have started looking at other housing options until purchasing a home becomes more affordable, resulting in slowly decreasing prices. 


Increase in Supply

The second factor which has allowed the housing market to be cooling down is the increase in houses being built. At the beginning of the pandemic, the government stopped all non-essential work to try and reduce the exposure people had to COVID. 


Image Credit: Shutterstock.com / sirtravelalot


Since the worst days of the COVID-19 pandemic are over and most restrictions have been lifted, construction companies have begun building homes again. Although the increasing supply has not reduced the median prices to pre-pandemic levels, it has still played a significant role in reducing the prices of homes and cooling down the housing market.


What to Expect As Housing Market Cools Down

As the implementations made by the federal government have been recent, they have not had a major impact on the housing market. However, with the reducing number of people purchasing homes, lower house prices will soon seem like a realistic feat. 

Lawrence Yun, the chief economist at the National Association of Realtors, discussed the current real estate market, saying, “People should not anticipate another double-digit price appreciation. Those days are over. So we may return to a more normal price appreciation of 4%, 5% a year.”


Housing experts are expecting prices to continue to rise but at a lower rate, which benefits aspiring homeowners as they may be able to purchase a home soon. 

The federal government's plan is still in its early stages. Although it has shown signs of potential success in the future, it is too early to determine whether this course of action will pay off. 

Main Image Credit: Shutterstock.com / hywards

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