Mortgage rates have gone up significantly in the last year and a half. This makes the monthly payments much more expensive for anyone buying a house if using a mortgage.

You could buy the same house for the same price from 2 years ago and expect to pay a few hundred dollars more per month for a typical house. Of course, it can be far more dramatic if you get a mortgage in the millions.

One would expect housing prices to fall since the cost of a loan is more expensive. Most people buying a house get a mortgage of some kind. There are very few who can just pay for a house out of their bank account and even fewer who actually do.

Supply and demand can be a funny thing. The higher price of a mortgage (the higher interest rate) would indicate that the prices for residential real estate should be going down. Yet, that hasn’t been happening much in most areas.

As always, real estate is local. But because everything is tied to the dollar and interest rates, the trends across the country tend to be similar. While prices may have declined a little from their peak, we have not seen a dramatic fall in prices.

The Supply Side

Real estate is a funny thing because there always seems to be exceptions and different rules for real estate.

In this case, the higher mortgage rates are actually limiting the supply of houses on the market.

I can speak from my own experience on this one. I was smart enough (but really mostly lucky) to refinance my mortgage at just the right time around early 2021. I got a 2% fixed -rate on a 15-year mortgage.

I have absolutely no plans on moving any time soon. If I did have to move, I would probably want to try to rent out my house and keep the mortgage. The rate is so ridiculously low, it wouldn’t make financial sense to sell the house unless there was a very good reason to move.

Most people don’t have a 2% rate, but there are a lot of people with rates around 3 or 4 percent. They are low compared to current rates around 7% for a 30-year fixed mortgage. So unless they are moving to another city or looking for a major change (perhaps a growing family), it is easy to see that most people are going to keep the house with the low mortgage rate.

If someone already owns a house and moves to another house, they will just be paying a much higher rate than they were before in most cases. So they have the incentive to not move.

This is keeping the existing supply of houses off the market to a large extent. It doesn’t prevent new homebuilders, but that takes a lot of time and investment. Most houses bought and sold are not brand new.

There Might Be a Breaking Point

This is bad news for people buying a house now who didn’t previously own one. They still have relatively high prices to contend with, coupled with higher interest rates.

If you are one of these people and you can wait to buy, then I would recommend doing so. You can either wait for interest rates to go down, or wait for prices to go down.

I don’t think this scenario is going to last for a long time. If we hit a deep recession in the next year or so, things can change quite quickly. People desperate for money may sell.

In addition, if the past is any indication, the Fed will lower its target interest rate again. Sure, there is price inflation to deal with, but that could go down with a deep enough recession. We all know the Fed will bail out the banks if needed.

So it isn’t an unrealistic scenario to imagine that interest rates could go back down in the somewhat near future.

Of course, if the Fed goes on another money creation spree, this could just reignite a run in housing.

But it is important to remember that prices can only go up as long as people can afford to pay them. If we hit a deep recession with higher unemployment, many families won’t be able to afford their mortgage with all of the other costs of owning a house. We are already contending with wages lagging behind price inflation.

Conclusion

Housing is highly unpredictable in this environment. The best thing to do, as always, is to think through the fundamentals.

Don’t take on more debt than you can afford. It doesn’t matter if you see a great deal or what the interest rates are. Once you are in the house, will you be able to comfortably afford it?

If you already have a house with a low interest rate mortgage, and you are not severely struggling, then it is probably best to stay where you are.

Moving is expensive anyway. Buying and selling a house isn’t like buying and selling a stock where there are low or no trading fees. Closing costs, moving costs, and other costs are expensive. Aside from a flipping business, you should never buy a house unless you plan to keep it for at least 7 years. 10 years or more is better.