Elevated Housing Demand May Prevent a Mortgage-Driven Market Cooldown

Though rising mortgage rates and home prices are slowing home sales across the U.S., homebuyer demand is still well above its pre-pandemic peak, and some home builders are even raising their projections and speeding along the pace of new home construction. 

Some economists fear that the Fed is risking a housing-led economic downturn in its more aggressive approach to combat inflation, but according to Barron’s, negative real interest rates and unwavering demand from homebuyers instead point toward strength in the housing market. As long as demand continues to outpace supply, rising interest rates may not have a considerable cooling effect on the housing market after all.

In essence, housing remains constrained by supply. Unlike the bubble of that burst in 2007-08, overbuilding seems little in evidence. The function of rationing demand was left to soaring prices while the Fed was holding its fed-funds rate target near zero and was ballooning its balance sheet to nearly $9 trillion by buying truckloads of Treasury and agency mortgage-backed securities.

Given that demand for new houses continues to run ahead of home builders’ ability to expand supply, the Fed has its work cut out for it. 

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