Thanks, Fed! Millions Of Homeowners Are Now Prisoners In Their Own Castles

Well, here’s what should be a wake-up call at the Eccles Building. As the Wall Street Journal noted this AM, home prices are rising again despite the crash of sales volume, and for a most perverse reason. To wit, in its wisdom the Fed drove mortgage rate deep underwater in real terms, thereby inducing one and all to “refi” at rock bottom rates and to use the savings for a trip to Disneyworld or whatever.

But now these homeowners are locked into their current mortgages and can’t put their properties on the market to trade for a different home, even if the kids have moved out and it’s time to downsize or relocate. And, heaven forbid, should they get a tap on the shoulder from their corporate boss about a promotion and transfer to another city. The mortgage payment increase would wipe-out all the gain!

While home sales have crashed, prices have started rising again. Most homeowners with mortgages have an interest rate below current levels, and they are unwilling to sell their homes and take on new mortgages at higher rates. Only 1.1 million homes were for sale or under contract in August, the lowest level for that month in data going back to 1999. The lack of supply is pushing up prices.

You don’t say!

But what we do say is that the chart below is not supposed to happen. Price usually follows volume for the obvious reason that normally a fall-off in volume indicates weaker demand and fewer bids for available properties. But in the present case the sharp volume decline appears to be due to a collapse of supply. That’s because homeowners next in line for the usual property turnover can’t afford to sell owing to the differential between their current monthly mortgage cost and the cost which would pertain at today’s market rates.

Accordingly, during the last 12 months existing home sales volume (green line) has fallen by 15%, even as previously falling home prices (purple line) have reversed direction and are now 4% higher than they were a year ago.

Change in Existing Home Sales Volume And Sales Price, August 2022 to August 2023