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What Drives Housing Prices and Mortgage Rates? A Simple Guide

The housing market can sometimes feel like a complicated puzzle. You might wonder why home prices are so high or why mortgage interest rates keep changing. Let’s break down the main factors that affect housing prices and mortgage rates in a way that’s easy to understand.

Ekim 30, 2024 12:36 ÖS
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More Homes for Sale, But Buyers Are Hesitant

Recently, there’s been an increase in the number of homes available for sale. This should be good news for people looking to buy. However, many buyers are still cautious. According to the National Association of REALTORS® (NAR), home sales dropped by 1% in September compared to August and are down 3.5% from last year.

Lawrence Yun, NAR’s Chief Economist, says that even though there are more homes to choose from and mortgage rates are lower than they were a year ago, people might be holding back because they’re unsure about the economy and the upcoming election (Tracey, 2024).

What Makes Housing Prices Go Up or Down?

Several key factors influence how much homes cost:

1. Supply and Demand

  • Supply: This is the number of homes available for sale. More homes on the market can lead to lower prices because buyers have more options.
  • Demand: This is how many people want to buy homes. If a lot of people are looking to buy, prices can go up.

Right now, even though there’s more supply, buyers are cautious, so demand isn’t increasing as much as expected.

2. Mortgage Interest Rates

Mortgage rates are the interest you pay on your home loan. Lower rates make it cheaper to borrow money, which can encourage more people to buy homes, increasing demand and prices.

As of October 30, 2024, the average 30-year fixed VA loan rate is 6.125%, which is slightly lower than last week’s average. Factors like your credit score and the type of loan you get can affect your specific rate (Birk & Dailey, 2024).

3. Inflation and the Cost of Living

Inflation means that the general prices of goods and services are going up. When inflation is high, everything becomes more expensive, including houses. The Consumer Price Index (CPI) measures inflation.

A study found that inflation significantly affects housing prices. When the cost of living increases, so do the prices of homes (Vaidynathan et al., 2023).

4. Economic Growth (GDP)

Gross Domestic Product (GDP) measures the total value of goods and services produced in a country. When GDP is growing, it usually means the economy is doing well, people are earning more, and they’re more likely to buy homes.

In the third quarter of 2024, the U.S. GDP grew by 2.8%. This growth can lead to higher demand for homes, pushing prices up (Bureau of Economic Analysis, 2024).

5. Money Supply

Money supply refers to the total amount of money in the economy. When there’s more money available, banks can lend more, and people can borrow more easily, increasing demand for homes.

The study mentioned earlier also found that an increase in money supply can lead to higher housing prices (Vaidynathan et al., 2023).

6. Unemployment Rates

When more people are unemployed, fewer can afford to buy homes, reducing demand and potentially lowering prices.

Even though the economy is adding jobs, first-time homebuyers are making up only 26% of sales, one of the lowest rates ever. High home prices and other financial challenges are making it tough for new buyers (Tracey, 2024).

What Affects Mortgage Interest Rates?

Mortgage rates aren’t just random; several factors determine them:

1. Economic Conditions

Factors like inflation, GDP growth, and the Federal Reserve’s policies influence mortgage rates. For example, if inflation is high, mortgage rates might increase to compensate for the decreased value of money over time.

2. Personal Financial Factors

Your credit score, the type of loan you choose, and how much you’re borrowing can affect your mortgage rate. Lenders look at how risky it is to lend you money. If you have a good credit score, you’re seen as less risky and might get a lower rate (Birk & Dailey, 2024).

How Housing Prices and Mortgage Rates Affect Each Other

  • Affordability: Higher mortgage rates make monthly payments more expensive, which can discourage people from buying homes. This can lead to lower demand and possibly lower home prices.
  • Buyer Behavior: If people think rates will go up, they might rush to buy now. If they think rates will go down, they might wait. Right now, many are waiting, hoping for lower rates.

Some Positive Signs

Despite some challenges, there are reasons to be optimistic:

  • Builders Are Building More: Construction of new single-family homes went up by nearly 3% in September, which can lead to more homes for sale.
  • Competition Still Exists: Homes listed in September received an average of 2.4 offers, showing that buyers are still out there.
  • Economic Growth: Steady GDP growth and low inflation rates are good signs for the economy and the housing market (Bureau of Economic Analysis, 2024).

In Summary

Understanding why housing prices and mortgage rates change can help you make better decisions if you’re thinking about buying or selling a home. Key factors include how many homes are for sale, how many people want to buy them, interest rates, inflation, economic growth, and employment rates.

Even though there are more homes for sale and the economy is growing, many people are still cautious about buying because of high prices and mortgage rates. Staying informed about these factors can help you navigate the housing market more confidently.

References:

George Scott, Realtor

Your Local Clarksville Real Estate Agent

(931) 385-5195

[email protected]

Keller Williams Realty

2279-D Wilma Rudolph Blvd.

Clarksville, TN, 37040

(931) 648-8500
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