There’s something odd going on in California’s housing market.
If you’ve bought a house in this state lately — or if you’ve thought about buying a house, perused your local listings and then deleted the Zillow app from your phone while quietly weeping — you’ve probably noted that interest rates are high these days.
Really high.
In fact, the rate on a typical 30-year fixed-rate mortgage cracked 8% on Wednesday, according to the tracking site Mortgage Daily News. Weekly data from Freddie Mac shows home borrowing rates are now higher than they’ve been in at least two decades.
That’s thanks almost entirely to the work of the U.S. Federal Reserve, which has been ratcheting up the cost of borrowing in an attempt to rein in inflation.
The way that’s supposed to work follows two steps:
- Step one: Higher rates make it less appealing for people to borrow money for big purchases and investments.
- Step two: Fewer people wanting to buy stuff leads sellers to cut prices.
A new report out on Wednesday from the California Association of Realtors shows that the state’s housing market is experiencing that first step in spades as sales continue to crash.
But step two? We’re still waiting.
The number of homes sold in September of this year is down 21.5% from the previous year, according to the Realtors report.
But despite the drop off in demand, California’s notoriously high home prices haven’t budged much. Statewide, they’re up about 3% over last year.
What’s the deal?
I asked Oscar Wei, deputy chief economist with the Realtors association, who explained that the housing sector can behave by its own economic rules. That’s because, unlike the people who sell new cars or clothing or groceries, someone selling a house is also often in the market to buy one. And they don’t like these high rates either.
- Wei: “Three years ago, many existing homeowners at that time locked in at a rate of let’s say, three percent… right now, when people look at the rate, it’s seven. Even if they originally planned on moving, they may not necessarily want to do that right now.”
To put that in Econ 101 terms, the high borrowing rates not only cool demand, putting downward pressure on prices, they simultaneously restrict supply, which boosts prices back up. The net effect: High rates combined with persistently high prices, pricing out ever more aspiring first-time buyers.
The high rates could also make it that much harder for state lawmakers to combat California’s housing shortage over the long run. Last week, Gov. Gavin Newsom signed 56 bills aimed at speeding up the building process in an effort to tackle California’s chronic housing shortage.
But cutting red tape only goes so far. The people in the business of building homes operate with borrowed cash.
Hence the result from a survey out this week by the National Association of Home Builders, which found that high rates have home builders feeling awfully glum these days. That’s especially true of those in western states, including California.
