How can American house prices still be rising?

According to an article from The Economist, the American housing market is facing a triple whammy of high prices, costly mortgages, and limited choice, making it difficult for those looking to enter the property market. Despite this, house prices have continued to rise, even as mortgage payments have reached their highest levels since the mid-1980s.

The article goes on to explain that the Federal Reserve’s hawkish stance over the past two years has led to a significant increase in mortgage rates, which have doubled mortgage payments for the median family buying the median home from roughly 14% of monthly household income in 2020 to nearly 29% in June 2023.  Surprisingly, this jump in mortgage rates has not led to a decline in house prices. They fell briefly as rates began to rise but have since rebounded to record highs hit early last year after covid-era stimulus boosted the economy.

One explanation for this resilience is that although demand for homes has fallen as rates have risen, the supply of properties has fallen almost in lockstep. Homebuyers typically obtain fixed-rate mortgages for 30 years, which is unheard of in most countries but viewed almost as a constitutional right in America, owing to the role of Fannie Mae and Freddie Mac, two giant government-backed firms that buy up mortgages from lenders and securitize them. In enabling lenders to offer long-term fixed rates, their objective is to make it easier for people to buy homes. But at the moment long-term rates are serving as an impediment since homeowners who got low-interest mortgages before the Fed ratcheted up rates have no desire to give them up and so are unwilling to sell their homes.

In summary, while high mortgage payments and limited choice make it difficult for those looking to enter the property market, rising house prices can be attributed to a combination of factors such as increased demand in exurban areas and smaller cities as remote work becomes more widely accepted, low-interest rates during this period that have made housing more affordable by lowering mortgage interest costs, and limited supply of housing.