High house prices fueled by low cost of borrowing | News, Sports, Jobs

We are in another housing bubble, with house prices well above the peak of the last bubble in 2006, according to the Case Shiller home price index.

Even adjusting for inflation, home prices are higher nationally than the last peak. Additionally, Hawaii still ranks among the most unaffordable states in the United States.

We hear all kinds of reasons for high house prices, but the clear culprit is the very low cost of borrowing. This was clearly demonstrated when the Federal Reserve Bank stepped in financially right after COVID-19 hit. At one point, mortgage rates fell below 3%. This fueled demand for homes when inventory levels (homes for sale) were already low, pushing up home prices even further.

The very low inventory levels puzzled the experts, but the answer is obvious. Homeowners aren’t selling, and the reason they aren’t selling is because house prices are too high. It is a paradox. The fewer homes there are for sale, the fewer homeowners will list their homes. Diminishing choice and resulting bidding wars means paying too much.

In addition, high house prices have implications for downsizing, property taxes, and capital gains taxes, to name a few.

There is a very clear inverse relationship between interest rates and valuations. With current high inflation putting upward pressure on interest rates, an increase in mortgage rates will put downward pressure on house prices, putting many homeowners in negative equity, one of the main causes of seizure. The increase in foreclosures will in turn affect credit markets.

Victor Saumarez


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