U.S. Home Prices Hit All-Time High as High Interest Rates Cause Supply and Demand Decline

Multiple factors have converged to push U.S. home prices to a historic peak.

On one hand, soaring mortgage rates have made homes increasingly unaffordable for the average buyer. On the other hand, the supply constraints in the market have worsened, with buyer demand still outpacing housing availability.

Chen Yuewu, managing partner at Golden Eagle Real Estate Investment, told Yicai Global that according to the latest S&P CoreLogic Case-Shiller Index, the average home price in the U.S. rose by 1% year-on-year in July 2023, reaching an all-time high.

He explained, “Currently, the U.S. housing inventory is about 2.5 months of sales, far below the six-month equilibrium point. The current inventory is only half of what it was before the pandemic. The U.S. housing market is experiencing a supply-demand imbalance that continues to drive prices upward.”

However, regional disparities in home price fluctuations are evident across the country.

Record High Home Prices

The latest S&P CoreLogic Case-Shiller Index shows that U.S. average home prices increased by 1% year-on-year in July 2023, marking a new record.

Since January 2023, the index has accumulated a 5.3% increase in average home prices, effectively offsetting a 5% cumulative decline observed from last June’s peak to this January during a market slowdown.

The cities with the highest year-on-year price increases include Chicago (4.4%), Cleveland (4%), and New York (3.8%). Conversely, Las Vegas (-7.2%), Phoenix (-6.6%), San Francisco (-6%), and Seattle (-5.5%) saw the largest declines.

Monthly price changes further illustrate the current state of the housing market. In July, average home prices rose by 0.6% compared to June, with all 20 cities covered by the S&P Case-Shiller Index showing month-on-month increases. However, the pace of price growth has slowed compared to the previous six months. Home prices peaked in June 2022 but experienced a six-month decline before beginning to recover in January 2023.

In July, average home prices surpassed those from June 2022, setting a new historical high. This indicates that the mid-term adjustment in the U.S. housing market ended eight months ago.” He also predicted that home prices in areas like Atlanta, Georgia, and Dallas, Texas, will rise by approximately 5% to 10% in 2023.

Affordability Challenges

The soaring home prices in the U.S. have become increasingly unaffordable for residents.

Newly released data from the U.S. Department of Commerce on new home sales is typically seen as a leading indicator for the housing market and shows that high prices and elevated mortgage rates are suppressing sales activity.

In August, new home sales were annualized at 675,000 units—the lowest since March 2023—and fell by 8.7% month-over-month, marking the largest monthly decline since September 2022. The median new home price was $430,300 (approximately 3.14 million RMB), significantly above pre-pandemic levels. A report from the National Association of Realtors indicated that as of late August, the national median existing home price was $407,000, up 3.9% year-on-year.

According to a recent report from real estate data provider ATTOM surveying 572 counties across the U.S., for buyers with an annual income of about $71,214, median home prices are out of reach in 99% of these areas. “This trend continues a two-year pattern where purchasing a home has become increasingly difficult for ordinary American workers,” stated the report.

Andy Walden, vice president of corporate research at Intercontinental Exchange Group, noted that current housing prices are extremely high and will require one of three extreme scenarios to return to pre-pandemic affordability: a price correction of 35%, a drop in interest rates by 4%, or an income increase of 55%.

He added that while there is significant potential for price fluctuations, a lack of inventory has kept prices elevated despite rising interest rates. “Entering August saw robust housing data; however, purchasing power still declined by about 6%.”

Mortgage Rates Nearing 8%

Currently, high mortgage rates combined with skyrocketing home prices have exceeded many ordinary buyers’ financial capabilities. The fixed-rate mortgage for 30 years hovers near its highest point in two decades and is gradually approaching 8%.

For buyers putting down 20% on a $400,000 home compared to pandemic-era lows, monthly mortgage payments have increased by about $930 (approximately 6,800 RMB). A year ago, fixed-rate mortgages were around 5.89%, while during the pandemic rates fell to about 3%. Despite mortgage rates nearly doubling compared to three years ago, home prices continue to rise primarily due to insufficient inventory.

Additionally, sellers who locked in low mortgage rates before the pandemic are reluctant to sell their homes, leaving eager buyers with limited options.

Recent data shows that new residential construction permits fell to their lowest level since June 2020 in August; residential starts decreased by 11.3%, with an annualized rate of 1.28 million units—creating a cycle where more Americans cannot afford new homes while builders’ enthusiasm for new projects hits a five-month low. Nevertheless, due to extremely limited existing inventory, builders still have opportunities to attract more potential buyers.