US housing prices have been largely unfazed by a jump in mortgage rates to a more than 20-year high, a trend that is adding pressure on the Federal Reserve to keep raising interest rates to curb inflation.

. . With global debt hitting the $300 trillion level, higher borrowing costs are creating stress throughout the financial system. Debt Reckoning is an 11-part series examining the issue across business sectors and economies. Cracks appear in US economy as debt, delinquencies creep up Rising interest rates do not stop US utility infrastructure, renewables spending Consumer loan net charge-offs at US banks approaching pre-pandemic levels US investment-grade companies to pull back on growth plans, deleverage Ballooning maturity wall a growing risk for speculative-grade companies The changing face of technology M&A Private credit poised to capture larger share of LP portfolios Recession raises risk of another debt crisis in the eurozone Eurozone banks face profit, liquidity drag as €500B of COVID-era debt comes due Even with clean balance sheets, oil and gas drillers exposed to rate increases Home prices defy soaring mortgage costs, adding pressure on Fed to raise rates .

The median home sales price was $396,100 in May, down just 3.1% from a year earlier when 20% more homes were sold, according to National Association of Realtors data. Meanwhile, the average 30-year, fixed-rate mortgage is up to 6.4% in the first half of 2023, more than double the 3.1% average rate in 2020.

The Fed's moves to raise interest rates by 500 basis points in just more than a year have driven the costs of mortgages higher in an effort to drive down demand and home prices. The housing market has an outsized influence on the domestic economy, with nearly three-quarters of the $17.05 trillion in US household debt tied up in mortgages, according to the latest Federal Reserve Bank of New York data. While the Fed at its June meeting paused rate increases with possible plans to lift rates again later this year, rising housing costs as demand widely outstrips supply is pressuring broader inflation and potentially puts the central bank on a path to keep hiking rates into 2024.

"It's hard to say where the Fed will stop with rate hikes," said Callie Cox, a US investment analyst at eToro. "If anything, I'd trust that the Fed will move mountains to get inflation back to 2%."

The Fed's push to keep interest rates above 5% will likely further pressure mortgage rates and, in turn, the US housing market.

Hitting the brakes

The Fed's rate hikes pushed mortgage rates above 7% in November 2022 — a level not seen since 2002 — and they remain at levels higher than any time since 2008. The rise in mortgage rates from pandemic lows caused a pullback in home sales, housing construction and overall demand, said Odeta Kushi, deputy chief economist at First American.

Sales of existing homes fell 20.4% year over year in May to 4.3 million units on a seasonally adjusted annual basis, according to the National Association of Realtors. Sales of existing homes fell to 5.0 million in 2022 from 6.1 million in 2021.

Single-family home construction starts also fell to 997,000 in May, about 70,000 fewer homes than were started in May 2022 and 314,000 fewer than the most recent monthly peak in December 2020, according to the latest government data.

In May, there were only 1.4 million homes for sale in the US, the lowest level since at least 2012, according to Redfin data.

"Real estate is a very interest-rate sensitive sector, which is why when the Federal Reserve first hit the proverbial brakes on the economy by hiking interest rates, the housing sector was the first to go through the windshield," Kushi said.

Still, that rise has not caused much of a decline in house prices, keeping them elevated near levels following a rally in response to near-zero rates during the pandemic.

Fewer sellers, largely due to homeowners locked in at relatively low rates, have hindered buying as the lack of inventory has kept a floor on just how low prices can fall, Kushi said.

"You can't buy what's not for sale," Kushi said.

'No real cooling'

The rise in mortgage rates has priced out about 18 million households from the market, causing a decline in builder sentiment and an 11% decline in single-family home starts in 2022, said Robert Dietz, chief economist at the National Association of Home Builders.

Declines are likely to continue into 2023 and 2024, Dietz said, but overall home prices have not declined as much as many expected due to inventory shortages in the resale market.

"The supply constraints are the reason the impact of the housing market has not been as strong as one would expect given a rise from 3% to 7%," Dietz said. "This is due to a decade of under building, due to constraints on lots, labor, lumber, builder lending and regulatory and legal cost burdens that have made home building more costly."

In the Baltimore-Washington area, there are about 50% fewer buyers than there were in 2019, said John Downs, a mortgage planner at Vellum Mortgage. Still, there is about 75% to 80% less inventory than there was before the pandemic.

"We're seeing a lot less activity, but buyers are still outpacing available inventory," Downs said.

Many of Downs' clients planning to sell their homes for upgraded, higher-priced properties have backed out of the mortgage approval process on the perception that it is a bad time to buy.

"People are saying: 'You'd be crazy to buy right now,'" Downs said, a market sentiment that is likely constraining total inventory. "One could argue that there is no real cooling because of the supply."

Fed in focus

The balance of the housing market largely depends on where Fed policy is headed, yet the largest impact of rate hikes may have passed, Fed Chairman Jerome Powell said in the press conference after the Fed's June meeting.

"We now see housing putting in a bottom and maybe even moving up a little bit," Powell said.

If the Fed continues to hike with little indication of a near-term cut, as many expect, the imbalance in the market could become more severe, however.

"As long as the Fed's fight against inflation persists, it will continue to put downward pressure on the housing market," said Kushi with First American. "Ultimately, more certainty about the Fed's actions will help to smooth out some of the volatility we have seen with mortgage rates."