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Rising Mortgage Rates Will Lead to Falling Housing Prices and More

The S&P CoreLogic Case-Shiller 20-City Composite Home Price Index recorded a 19.1-percent year-over-year increase in January. It was representative of the .5-percent increase over the prior month, with a month-to-month gain of 1.8 percent from December to January. The Case-Shiller National Home Price Index experienced a 19.2-percentage growth rate between January 2021 and 2022. While these numbers may seem insignificant to most people on the surface, they are a significant amount.

Craig J. Lazzara, director of management for S&P DJI (S&P Dow Jones Indices), provided some context in the Case-Shiller report. “Last fall, we saw that the cost of homes, despite still rising quite quickly, had started to slow down. The modest slowdown was halted at the beginning of the month of January.” This type of change means that American buyers analyze more closely before purchasing since bigger problems may lie on the horizon.

The housing market isn't equipped to endure gains of 20 to 30 percent per year–as was witnessed in 2008 when the bubble burst due to a steep rise in the number of subprime mortgages available and people buying houses they could not afford. Then the bubble burst, and the market began to flood with foreclosed homes. With entire neighborhoods in foreclosure, anyone who was in a position to pay their bills on time was faced with the burden of owning a home that was worth less than the amount they owed on their property.

The current situation involves an overflow of cash buyers flooding into the market on the back of low interest rates. While most Americans are trying to purchase the houses they want with minimal mortgage-interest rates, cash buyers come into the market and offer the asking price, without checks or contingencies. This could trigger an auction, which may eventually result in buyers paying more than the property is worth. However it is happening, the market is stretching upwards as a result of these purchases and is thereby sustaining prices that are rapidly rising by creating new lower bottoms.

This is the point at which the U.S. Federal Reserve System is coming in, believing that raising interest rates will allow the housing market to improve and enable people to buy houses. Stability in the market is something that homebuyers haven't experienced in the past few years, particularly in states such as Arizona and Florida, which are not alone in their growth. These two states have the highest rates of growth, according to the Case-Shiller study. With Phoenix reporting an increase of 32.6 percent growth, Tampa surging up 30.8 percent, and Miami with 28.1 percent, these cities have not done anything but keep growing.

And why shouldn't they? A huge number of migrants from California and New York City have left to escape the high cost of taxes and the rogue policies. And with the significantly lower cost of real estate in comparison, everything seems like a bargain. After the COVID outbreak began and jobs were moving out of reach, these cities were the best places to go. They could maintain their high wages and purchase an apartment with cash. Given how quickly real estate can be sold in areas such as San Francisco or Manhattan, the decision was an easy one to make for the majority of them.

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