Housing's Tough COVID Recovery

A quick review of historic mortgage rates shows that rates fell to unprecedented lows in the range of 3% in 2021 and 2022.  Why? To mitigate the economic impact of the pandemic, the Federal Reserve lowered interest rates and purchased an unprecedented amount of mortgages. The pandemic impact has subsided but has been followed by a surge in inflation that has yet to be tamed. High inflation has pushed mortgage rates to levels not seen in over a decade, but still below current inflation rates, giving lenders "negative yield". evident in the following table:

Home prices jumped 10% or more in 2021 and 2022, benefiting from low mortgage rates as buyers competed to purchase homes in a tight-inventory sellers' market and lock in their monthly payments. High inflation has also been a plus, increasing values of hard assets like real estate. However, times have changed. Buyers are much less excited about higher monthly payments, even if the inflation rate is more than the interest cost. According to the Mortgage Bankers Association, the average US mortgage is slightly more than $350,000; increasing the 30-yr. mortgage rate from 3% to 6% causes the monthly payment to rise $525, or $6,300 a year.

The many positive reviews of real estate over the past two years have focused on temporary COVID-related actions that helped values. Now that they have ended there may be a period of volatility when prices give back some of the gains related to pandemic-fighting policies. It's time to center attention on some of the features of real estate that provide permanent support for value: a hard-asset cost basis that buttresses underlying value in good or bad markets and offers an inflation hedge; long-term financing that gives opportunity for owners to build equity in an asset that they are using; owner motivations to make improvements that enhance the asset and the neighborhood; the community benefit provided by long-term residents. As the Dow Jones 1953-2021 chart of nominal and real (inflation-adjusted) prices shows, home values follow economic trends but have risen over the long run.