The American real estate market has entered a strange world

The American housing market distorts the most fundamental principle of economics: supply and demand. CJ Burton/Getty Images

The U.S. housing market distorts a fundamental principle of economics: supply and demand.

Home prices hit record highs in May, even as existing home sales fell and the supply of homes for sale increased.

“It's a real headache,” said economist David Rosenberg.

The U.S. housing market has officially entered a weird world.

The law of supply and demand is a fundamental principle of any free market, and right now it is being upended by strange events in the real estate market.

The supply of homes for sale increases while demand decreases. And yet, real estate prices continue to reach record highs.

“When it comes to the housing market, the laws of supply and demand no longer seem to apply,” economist David Rosenberg said in a note this week.

Existing home sales fell to a four-month low in May at 4.11 million units, down 2.8% year-over-year, while existing homes available for sale rose 18.5% year-on-year in May.

“Unsold inventories increased from 2.9 months in February to 3.2 months in March, to 3.5 months in April and 3.7 months in May, which represents the highest level since June 2020” , Rosenberg said.

Yet despite the drop in demand, as measured by lower existing home sales and increased supply, the median home price jumped 5.8% year over year to a record $419,300 in May.

“It's a real headache. Demand is at a four-month low, supply is at a four-year high and prices are at record levels,” Rosenberg said.

Part of the divergence is that real estate is a very regional and localized market, with some areas stronger than others. Texas and Florida, for example, have seen home prices decline amid a boom in the supply of homes for sale.

The other part of the equation is mortgage rates, which are at multi-decade highs around 7%, which has put many potential buyers out of business and blocked potential sellers who don't want to. not refinance their next real estate purchase at higher rates, which has the effect of freezing the market.

But the dynamic of falling demand, rising supply and rising house prices cannot last forever.

“At some point, something is going to have to bring down interest rates or prices,” Rosenberg said.

Some market experts believe that real estate prices are about to fall significantly.

Market strategist Chris Vermeulen pointed to a plateau in homebuilder activity as a reason to believe the housing market could see a significant decline.

“The reality is I think we're going to see this collapse,” Vermeulen said.

The story continues

However, others expect home prices to continue rising once the Federal Reserve cuts interest rates. Markets expect the central bank to make the first cut at its September policy meeting, according to the CME FedWatch tool.

Lower mortgage rates would help ease borrowing costs, but would also boost demand as more borrowers rush into the market.

Well-known investor Barbara Corcoran has said that lower mortgage rates would push home prices even higher.

“As soon as real interest rates drop one more percentage point, everyone will jump into the market and you'll pay a lot more for your home,” Corcoran said.

Read the original article on Business Insider

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