: How does the housing market work? What will it take for the interest rates to drop? Is there any hope in sight?
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The housing market is a market, so all the forces of supply and demand apply.
It is such a huge market with much inelastic demand (everyone needs housing) that it is fairly unique. Also, unlike some countries which restrict what can buy housing, in the West it is perfectly legal for big corporations or investment firms to buy up much housing and land if they think they’ll get a return on investment. Low interest rates and policies like quantitative easing effectively created a lot of money from scratch which pushed up the housing market to current levels.
Interest rates are set considering the entire economy, but certainly with consideration that no one wants the housing market to completely crash. The effect of higher interest rates already caused a few banks to effectively go bankrupt as it made some old bond investments worthless. I can’t answer about hope, but I’d agree there’s some precariousness now considering inflation and supply issues.
*How does the housing market work?*
The housing market is like any market, in that it is driven by supply and demand. There is high demand for housing in nice places, so the houses are more expensive. There is low demand for housing in less nice places, so the houses are less expensive. This is why, for example, houses in Malibu, California are more expensive than houses Birmingham, Alabama.
*What will it take for the interest rates to drop*?
Interest rates for mortgages (I assume you mean for mortgages) are driven by many factors, including the overall health of the economy, an individual’s credit worthiness, the amount of the loan, and more. If you’re credit is good, your loan is relatively small, and the property is in a desirable area, you will get a better mortgage rate. Mortgage rates are also subject to supply and demand: if lots of people are taking out loans, mortgage rates will go up; when fewer people are taking out loads, mortgage rates will go down. With mortgage interest rates currently very high, fewer people will be taking out loans, and mortgage rates will go down. Mortgage interest rates are also influenced by the Federal Reserve’s short term lending rate, which is currently very high. When the Federal Reserve lowers the rate, mortgages will come down.
*Is there any hope in sight?*
(This part is mostly my opinion.)
Yes, there is hope in sight. We are in the middle of a transformation of society – more and more jobs are being done remotely, and it is easier than ever to have a job that is based in a high-pay city while living and working in a more affordable area: you may work for a company with the home office in San Francisco, but live in Clearlake (the most affordable city in California, according to some web site I just looked at). Also, many cities are re-evaluating the zoning laws that have kept the housing market artificially high, leading to higher density housing. More housing means more affordable housing.
It’s a scary time to be alive, because things are changing. But they can change for the better .
The housing market works like most markets: price is determined by supply and demand. If there is limited supply and high demand, prices go higher. If there is tons of supply but hardly any demand, prices go lower. Unlike most other markets, demand (and to some extent supply) depends on interest rates, since most people buying homes need loans, and those loans are subject to interest rates. Dropping interest rates is actually really easy. In the US, the federal reserve sets interest rates and banks loan a little higher than they can borrow. If the federal reserve drops interest rates, the rates at the banks drop. The federal reserve is worried about inflation though, so that’s why they have raised rates. It does appear that the raising of rates is working to reduce inflation and we can expect them to keep them steady or drop them if inflation cools off more. The problem with the current housing market is that people who got low interest rates a couple years ago know that it would cost a lot more to borrow today, so they aren’t selling. That reduces the supply. Demand is steady in most places. So prices aren’t dropping much (and are increasing in some parts of the country). You would expect that to change over time because a lot of the time, people don’t have a choice about moving, but for now people are keeping their homes with low interest rates and builders are pretty cautious because of the high interest rates making it more expensive for people to buy a house.
Mortgage interest rates are benchmarked to the Fed rate. As the Fed has raised rates to try and slow inflation, mortgage rates have climbed. We may need to wait for inflation to get under control and the Fed start lowering rates to see relief on mortgage interest rates.
Historically since 2000, mortgage rates about 6% are the norm. 4% range was seen post-2009 and during COVID we saw the rates around 3% even. Not sure we’ll ever see those historically low rates again, but I suspect we’ll see 4-5% range down the road.
To add on to what others have said, current interests rates are actually pretty normal.
Historically, they are even a bit below normal.
The unusual rates were the 2-4% that we saw for a few years.
Of course, the combination of these rates with high home prices makes it tough to buy for many.
But that’s not the concern of the Fed.
There is a good chance that the Fed waits for supply to meet demand and drive down home PRICES before they even consider lowering fed rates to try to influence mortgage rates to come down.
People want houses, driving up prices. Population increases (births or immigration) raise prices.
People build houses. There’s a whole tangled mess of zoning, incentives, bribery, NIMBY, and I-got-mine politics. But more houses drive down prices.
Most people can’t pay cash for a house so they get a loan, called a mortgage. If you can’t pay this loan, they take the house so banks are more willing to lend money for something when it is it’s own collateral.
Banks set mortgage rates based on the rate they themselves can get a loan and how much they trust you with a loan.
The loan rate that banks get is set by the big bank called the Federal reserve (or other similar central banks in various nations). The Federal Reserve is in charge of keeping the value of money steadily and slowly inflating. They printed like mad when covid hit, and eased back when things started back up, and didn’t get it exactly right. Which is understandable, covid as a mess with a lot of unknowns. But since they missed the target, money inflated more than they wanted and the way they fix that is increasing the loan rate they give to banks.
Mortgage interest rates only tangentially relate to housing costs, and it’s all a feedback system affecting everything else. Lower rates mean more buyers means more demand means higher prices.
>Is there any hope in sight?
Yes. [It looks like it peaked in July ’22 and is now down to ~3%.](https://www.statista.com/statistics/273418/unadjusted-monthly-inflation-rate-in-the-us/) Which is about where they want it. So yeah, they’ll ease back rates as low as the economy will afford. You know, “soon”.
But if you want to afford a house, rather than pleading with the Fed you should probably ask your representative to outlaw people treating houses like hotels. Even if rates go low and everywhere magically gets affordable, they’ll all be bought by big businesses or rich dicks and turned into Air BnBs or rental properties.
In general, mortgage rates are linked to bond interest rates of similar duration, which is driven by the bond market’s expectations of what short-term interest rates will be in the future.
That in turn is driven by general economic expectations as well as people predicting what the Federal Reserve will do in the future.
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