Can't Control Household Loans with Interest Rates?..."Unusual Phenomenon of Simultaneous Rise in US Interest Rates and Housing Prices"

NYT Analysis... "Impact of Inflation, Investment Demand, and Supply Shortages"

[Image source=EPA Yonhap News]

[Asia Economy Reporter Jeong Hyunjin] Amid renewed attention to household loans in South Korea, concerns have been raised in the United States that even the soaring mortgage rates may not be able to cool down the overheated housing prices.

On the 31st (local time), The New York Times (NYT) analyzed, "Generally, when mortgage rates rise, it helps to calm housing prices, but the situation may be different now." It suggested that mortgage rates and housing prices could rise simultaneously. Edward Zyler, Vice President in charge of Housing Economics at the Mortgage Bankers Association, said, "Too many strange things are happening right now."

This unusual phenomenon is the result of a complex interplay of high inflation rates, rising rental costs, and increased housing demand. With the expansion of remote work, demand for homes has increased, but with inflation rising at the highest rate in 40 years and rents surging, potential homebuyers have judged that it is better to take out a loan at a high interest rate and purchase a home rather than rent.

As of today, mortgage rates have reached 4.67%, the highest since December 2018, but considering the inflation rate approaching 8% annually, some may think that buying a home with a 30-year fixed-rate loan at this interest rate is actually beneficial.

Additionally, historical experience during past inflation periods, when real estate was a better investment than stocks or savings, is also encouraging buyers' decisions. In fact, despite mortgage rates rising by 0.5 percentage points over the past four weeks, NYT reported that there is little evidence that the housing market has stabilized. Apit Gupta, a professor at New York University’s Stern School of Business, pointed out that as the burden of higher rates causes some potential buyers to give up on purchasing homes, if rents in the rental market rise even more, it could increase the demand segment that prefers buying a home instead.

The shortage of housing supply was also mentioned as one of the reasons why housing prices have not stabilized despite rising interest rates. Currently, the number of homes on the market in the U.S. is at an all-time low. Many homeowners prefer to receive rental income rather than sell, and even single-home owners are hesitant to move due to the simultaneous surge in home prices and loan interest rates, NYT explained.

Sam Carter, Chief Economist at U.S. mortgage company Freddie Mac, said, "High loan rates solve nothing," adding, "They may bring a bit more balance to the market, but they will not solve the structural problem (supply shortage)."

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