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High Demand, Low Supply, and the Impact of Interest Rates

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High Demand, Low Supply, and the Impact of Interest Rates

Everyone seems eager to understand the enigmatic state of the housing market. “What the heck is going on with the housing market?” is a headline that’s been making waves lately. Despite mortgage rates reaching a 20-year high, the housing market continues to astound with its surprising tightness. Regular viewers of my YouTube channel may find it less surprising. As we’ve been asserting for over a year demand will remain high while supply stays low. Unlike discretionary items like socks, cars, boats, or furniture, a house is a necessity. Whether rented or owned, a house is an essential requirement for everyone. This inalienable demand remains constant, with millions of people still seeking shelter, some even living on the streets due to the lack of housing.


While demand remains steady, the housing market does experience fluctuations concerning affordability. The appetite or budget for housing may rise or fall, but seldom does anyone expect the cost of a house to decrease from one year to the next. Housing prices tend to climb year after year. The housing decline in 2008, was often referred to as a crash. An anomaly was driven by artificially inflated demand when too many people bought multiple houses with adjustable-rate mortgages, leading to severe consequences.

The Driving Force Behind the Housing Crunch

Supply, on the other hand, increases only when new houses are constructed. The number of houses in an area has remained relatively stable over the years. Even in the resale market, the total number of houses available does not significantly change. The available supply can be influenced by people deciding to sell their homes, relocate, or deal with estates after a person’s passing. These factors affect the available supply, but they do not fundamentally alter the total number of houses in the market.

Despite the ongoing construction of new houses, the backlog in demand has reached staggering numbers of 5-6 million homes over the past few years. Catching up with this backlog seems almost impossible. Contributing to the persistent tightness in the market. The recent trend sees more people transitioning from apartments to houses, further diminishing the number of houses available for purchase.

Interest Rates: A Key Player in Shaping the Housing Market’s Trajectory

As many prospective homeowners contemplate the timing of their purchase, they may be tempted to wait for interest rates to drop. This strategy comes with risks. Home prices are likely to surge while waiting. Although lower interest rates might indeed result in higher home prices, the same demand-driven dynamics continue to push prices upward even when interest rates rise. Homebuyers tend to find a way to afford the rising prices. They may opt to settle for smaller or alternative housing options. The housing market is relatively inelastic, with the necessity of having a place to live outweighing the fluctuations in prices and interest rates.

Understanding the complexities of the housing market is crucial for potential buyers and sellers. With soaring demand and limited supply, the housing crunch shows no signs of abating anytime soon. Interest rates do play a role in shaping the market’s trajectory. The primary driver of the housing market remains the perpetual demand for housing. As homeowners contemplate new purchases, the desire for a house persists. Making the dream of homeownership a resilient and enduring one.


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