Why are prices still so high?

Interest Rates

Since March 2022 the federal reserve (the Fed) has hiked interest rates from 0% interest rates ten times to where it currently sits at 5.25%. The fed claims this has been done to tame inflation.

The latest data shows inflation is finally waning to 4%. Still higher than the magical 2% rate they are looking for.

As mortgage rates follow fed rates, those two have increase to where they now sit at 7.22%.

This means the house you can afford is less if you choose to get a mortgage. For example at $1 million home with an $800,000 loan at 7.22% will require $5,441 a month just on the loan (taxes, insurance, and utilities would also need to be paid). But if you had a 2.5% interest rate like many people did in 2021 then you now are only paying $3,160/ month. Almost $200 difference each month.

This should make housing prices go down and historically that has happened. But why not now?

Pandemic effects

The pandemic changed two major things about work life for many Americans:

• Remote work became more common place.
• People don’t go into the office everyday even if they live nearby.

Because of this the pressure to relocate for a job is much less. This translates to less people selling homes and thus makes the market supply constrained. Despite the rising rates by the fed, the labor market has remained red hot with many high paying jobs open and available.

Let’s suppose someone had an $800,000 mortgage at 2.5%. Their monthly payment is $3,160. You can see that if they bought another house with an $800,000 loan at todays rates they are looking at $5,441 payment a month just in mortgage expense. This dramatic increase shows why it would be difficult for someone to move.

This means people won’t move. Less than 10% of all mortgages are above 6%. Even back in the early 2000s I spoke with people who lived in the heart of Huntington and they all said: “There’s no way I could afford my house today”.

One last item: Proposition 13. Buying a home in this neighborhood would make you pay around $15,000 a year in property taxes adding more than $1,000 a month on top of that hefty mortgage payment. Your neighbor who’s lives there for 20 years? They’re paying $7,000 or half of what you would pay. It’s hard for them to want to move and then increase their property expenses.

This leads to a lot of older people remaining in the area, low turnover, higher prices and a lack of pressure to sell. The most likely people selling now in this neighborhood? Older people who are no longer able to take care of the property, walk up stairs and need a different living accommodation.