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U.S. Housing Market Faces Frozen Activity Amid Soaring Mortgage Rates and Supply Shortages

The U.S. housing market is experiencing a notable slowdown, reminiscent of the 2010 Great Financial Crisis, as existing-home sales plunge to the lowest level since that challenging period. Skyrocketing home prices and a peak in mortgage rates at 8% are creating a frozen housing market, with echoes of the lock-in effect—existing homeowners reluctant to let go of their 3% mortgage rates.

Renowned economist Gary Shilling, who accurately forecasted the 2008 housing crash, highlights the current anomaly in the housing market. Despite the rise in mortgage rates, housing inventories are facing a shortage, contributing to the depressed and unaffordable state of the market. Shilling points out that homeowners are hesitant to sell and move due to the substantial increase in mortgage rates.

While mortgage rates have slightly eased from their peak in October 2023, hovering around 7%, meaningful change isn’t anticipated in the near term. Shilling predicts a gradual revival in housing activity over the next three to four years, acknowledging the time it will take for significant shifts to occur.

Housing experts emphasize the fundamental supply-and-demand dynamics at play. With a scarcity of houses on the market, competition intensifies, leading to a continuous surge in home prices. Marc Norman, associate dean of NYU’s Schack Institute of Real Estate, notes that the lack of supply is a primary factor propelling prices higher. While changes in interest rates, construction pricing, and land availability may impact supply, Norman highlights that geographical variations will characterize the housing market’s revival.

The frozen housing market is also attributed to the persistence of NIMBYism (Not In My Backyard) in certain areas, where homeowners resist development in their neighborhoods. Tom Barkin, president of the Federal Reserve Bank of Richmond, emphasizes the need for community buy-in to overcome obstacles related to housing development.

Despite differing opinions on the severity of the frozen market, experts agree on the central issue of low inventory levels and pent-up demand. Dan Green, CEO of Homebuyer.com, points to a significant imbalance between buyers and sellers, characterizing the current state of the housing market as one with empty shelves and a notable shortage of available houses.

As the housing market navigates these challenges, the industry awaits changes in interest rates, policy adjustments, and community initiatives to address the fundamental issues contributing to the current frozen state. The revival, while anticipated, is expected to be a gradual and region-specific process.

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