As home prices rise and mortgage rates reach new highs, buyers feel disadvantaged

In today’s housing market, it seems as if what goes up doesn’t necessarily have to come down.

Home prices seemed to finally ease back late last year after a price surge that began during the pandemic. Nationally, rates gradually declined in the second half of 2022 as mortgage rates rose in response to rising interest rates. Some areas where a lot of new homes have been built – such as Austin, Texas; Boise, Idaho; and Charlotte, North Carolina – saw significant price declines.

That was certainly a double-edged sword for a lot of people. Higher interest rates tend to lower home prices, but that’s because they make it more expensive for buyers to borrow money to finance their purchases.

The interest rate increases were not enough to undo the significant price gains made over the past few years, especially in parts of the United States where home sale prices already exceeded the national average, but the change came as a relief to many people.

Then something even more surprising happened early this year. Prices started to rise again. Prospective homebuyers, who might have breathed a sigh of relief a few months ago, are now staring at an unlikely double whammy: Prices are at all-time highs even as mortgage rates soar to their highest levels in 23 years.

The average U.S. interest rate on a 30-year mortgage was 7.49% on October 5, according to government-backed lender Fannie Mae.

In fact, an NBC News analysis of data from Zillow found that estimated mortgage payments have increased in more than 500 cities since the end of 2020, with payments doubling in more than half of the cities.

Shoppers frequently compromise, then give up

Tracy Golson Halperin, a New York City resident who works in medical device sales, said she and her husband have been looking for a home for a year now. At first they tried to wait, thinking that higher mortgage interest rates would bring rates down and make bidding wars less intense. But this did not happen in the areas they were searching.

They started with a well-above-average budget of $1 million, were hoping to find a three- or four-bedroom house near a train line, and the couple felt time was on their side.

“We had to increase the cities we were looking at, scale back our expectations a lot, and increase our budget,” she told NBC News.

They initially hoped to buy a home in Westchester, but Jolson-Halperin accepted that she and her family were more likely to find what they were looking for in Connecticut. She said she expects a two-hour commute to New York City some days, and has considered saving the upper portions and cities with less impressive school districts.

At some properties, she says, they made offers with mortgage contingencies dropped — a mechanism buyers use as an additional offer from a purchase if certain issues arise — and went as much as $100,000 above the asking price of the home they were bidding on.

None of that worked. She said they decided to slow down and rent instead.

“We think we’ll rent out of town and get to know the towns,” she said. “We feel like we missed out.”

“Prices in the areas we really liked were going higher and higher. It seemed like with every sale, the homes were going higher and higher, and we started to push prices lower,” Jolson Halperin added.

According to the latest data in July, the S&P CoreLogic Case-Shiller National Home Price Index hit a record high, 1% higher than a year ago. The increase in prices over the past few months has canceled out the decline that occurred in late 2022.

In a press release, Standard & Poor’s said prices rose in all 20 major cities it tracks, and indicated they would likely continue to rise.

Higher rates cause supply to shrink again

The new problem is that fewer people want to sell, even if there is no better time for them to cash in on their homes. The National Association of Realtors says there were about 1.1 million unsold homes on the market in August, down about 15% from a year ago.

Greg McBride, chief financial analyst at Bankrate, told NBC News that as interest rates rise, people who bought their homes years ago and took out mortgages at 3% or 4% interest rates are becoming less likely to move.

This means supplies are low, causing prices to rise again.

“The reversal we’ve seen in the housing market has come despite rising mortgage rates because the prevailing dynamic is a very limited supply of homes available for sale,” McBride said. “In many markets, this has contributed to higher prices. In others, it has led to price floors or limited price declines.”

Even realtors are sounding the alarm, as they are unhappy with the shortage of homes for sale. In a Sept. 28 press release, National Association of Realtors Chief Economist Lawrence Yun said the supply of homes needs to double just to cushion recent price gains.

McBride said prices will eventually stop rising, but until then, they will likely become stable rather than fall too much, at least nationally. Prices can fall in response to rising prices, but that will take much longer.

“There will be a tipping point where high interest rates saps enough demand that even with limited supply, there will be no fuel to push prices higher,” he said.

“At what point will the very limited supply picture improve? It probably won’t happen with mortgage interest rates at around 8%.”