Understanding the Current Housing Market Trends and Where It’s Headed Next

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The red hot housing market has been giving the summer heat a run for its money! The dramatic rise in prices (about 16% since last April) has been a roller coaster ride for buyers and sellers alike. Whether you are a homeowner or looking to be one the price of homes has a significant impact on your overall finances. There are a few factors that influence the housing market and where its headed. Understanding them will provide insight about how the market works and when may be the best time for you to buy or sell.

Federal Reserve Data For Median Home Prices Q2 2020-Q2 2021

Factors Affecting the Current Housing Market

  • Mortgage Interest Rates
  • Mortgage Credit Availability
  • Housing Inventory
  • Economic Growth/ Trends

Mortgage Interest Rates

A common misconception is that mortgage interest rates are set to the rate of a 10 year treasury note. Unfortunately, the truth is a little more complex.

  • The Federal Reserve (Fed) sets the rate 10 YR treasury note rate.
  • Mortgage interest rates are highly correlated to 10 YR treasury rates but are their own independent interest rate not directly set by the Fed.

The two independent rates do not always move in tandem. Here is an example from early 2020 where the Federal Reserve (the nations central bank) reduced the 10 year rate but mortgage rates did not follow. The shaded area represents February-April of 2020; right when COVID-19 came onto the scene.

The Federal Reserve Lowers 10 yr Interest Rates in Response to COVID-19
Mortgage Rates Did Not Follow and Initially Spiked

The Federal Reserve Data shows how the two rates do not move in lockstep. The reason why is that mortgage rates are also affected by the mortgage backed security market (the things that caused the 2008 recession). While less direct, mortgage rates are also affected by inflation and tend to rise when inflation is expected. The expected part is important because the expectation alone is enough to drive rates higher. Today, many are expecting inflation to creep up (and it is higher than in the past) so it would not be surprising if rates increase towards the end of 2021.

How Mortgage Interest Rates Affect the Housing Market

When mortgage rates fall your average homebuyer can afford a larger mortgage. Therefore, individual purchasing power increases. It also makes people who were waiting on the sideline want to buy a home now to take advantage of such a low rate. Unsurprisingly, this drives demand and home prices increase. The dramatic rise in home prices over the last 12 months was fueled in part by how cheap mortgages were. More people wanted to buy homes and could simultaneously afford more expensive houses.

Take Aways

  • Low mortgage rates have increased home prices by giving consumers greater purchasing power and making more people want to buy a house at historically low rates.
  • Mortgage rates do not move in conjunction with the Federal Reserve’s set rate on the 10 YR treasure note. If you are interested in buying today you should not wait to see what the Fed is going to do.
  • Rising (or the expectation of) inflation creates the conditions that drive mortgage rates higher. Expect that as inflation remains a concern throughout the end of 2021, interest rates may increase.

Mortgage Credit Availability

Mortgage Credit Availability

The willingness of banks to loan to potential homebuyers. It is measured on the Mortgage Credit Availability Index maintained by the Mortgage Bankers Association (MBA).

Less talked about but equally important is the restrictiveness of mortgage lenders. It is important for two reasons:

  1. Loose credit standards when the market is hot (like it currently is) lead to the same issues that caused the 2008 Recession. It is important that mortgages are made to trustworthy buyers regardless of the performance of the housing markets. This is because mortgage backed securities are bundles of mortgages that are sold to investment firms or insurance companies and essentially act as safe bonds to those companies. Defaulting on mortgages causes a systemic domino effect throughout the financial system because mortgages are packaged like this.
  2. If mortgages are hard to get, it can counteract the effect of lower interest rates. Many people will want to buy a house but will be unable to do so.

There’s a fine balance here for lenders. When rates are low, they make less on every mortgage they sell so the temptation is to sell more mortgages. However, that shortsightedness is now a well understood danger and institutions are also more hesitant to loan with employment uncertainties related to COVID 19.

Understanding the Mortgage Credit Availability Index(MCAI)

The purpose of the MCAI is to assign a quantitative value to lending requirements over the last 10 years. It measures borrower worthiness requirements (credit score, loan to income ratio etc.) of various lenders every 6 months and interpolates between those points. The base of 100 is assigned to March of 2012 so all values are relative to that point. A lower value indicates a tightening of lending while an increase means mortgages are easier to obtain.

Current Trends of Mortgage Credit Availability

Currently, Mortgage Credit Availability is at an almost ten year low and has been trending downward for a year or so. It moved significantly lower during COVID 19 as banks were hesitant to lend in an uncertain environment.

Take Aways

  • Mortgage Credit Availability has been decreasing for a while and will likely continue to decrease in the short term (rest of 2021). Eventually, it will reverse in accordance with the long term trend and mortgages will be easier to obtain. If you are having difficulties obtaining a mortgage right now, waiting may help.
  • The increased difficulty of applying for a mortgage means that the current increase in home prices is a sustainable trend over the long term. The risk factors that caused the 2008 recession have been mitigated so this rally is different. The market may cool down, but a 2008 meltdown is highly unlikely.

If you are interested in learning about mortgages in more details or will be applying for one in the future check out our article Everything You Need To Know About Mortgages.

Housing Inventory

Housing inventory is the primary driver on the supply side of the market. It consist of two major categories:

  1. Number of Homes for Sale (Active Listings)
  2. New Construction Starts

Homes For Sale

The number of homes for sale has consistently decreased over the last few years. This led to a historically low inventory at the same time that historically low mortgage rates created a ton of buyers. These conditions account for why home prices rose from both a supply and demand perspective. Fortunately, this trend has recently began to reverse and more homes have come onto the market in the last few weeks. As home prices increased and homes were selling quickly, more homeowners were attracted to selling and cashing in on the action.

Active Listings Have Increased Since May

New Construction

New constructions are very important in the long term because it creates a greater supply of houses. Years of underbuilding have led to an acute housing shortage across the entire US. This was compounded by the fact that homebuilders were delaying selling homes (to try and sell them for a higher prices later) and supply chain issues such as the skyrocketing cost of lumber. All of this contributed to making the new build house supply insufficient to meet the demand of the market. Recently, housing starts have been increasing as builders resolve supply chain issues that were derived from COVID 19 shutdowns.

New Construction Houses Have Increased as Home Builders Look to Take Advantage of a Hot Market

Home For Sale vs. New Construction

It is important to keep in mind the relevance of these two factors to overall housing inventory. Home Sales is a short term factor. As prices increase, people will be more likely to sell and this can quickly increase the inventory. Conversely, it is very difficult to quickly obtain permits and begin new construction. Home construction is a long term factor; new homes are what grows the overall inventory of houses relative to the overall demand for them.

Take Aways

  • Housing inventory has lagged housing demand for years. This has led to a decrease in available homes. This trend will likely continue over the long term to the benefit of current homeowners.
  • In the short term, more houses are coming to market as owners look to cash in on the high demand. This feedback mechanism counteracts the strong demand. If this trend continues it will slow home price increases over the remainder of the year.

Economic Trends

This market has increased the value of homes across the country, but some markets have been significantly stronger than others. A lot of this has to do with homeowners in high cost of living areas moving to lower cost of living areas or retirees moving to warmer weather. One popular move has been from New York to Florida. The data captures this trend by showing the movement of people and the corresponding strength of the markets.

Welcome to Florida!

According to US Census Data

  • New York’s population has decreased since 2016.
  • Florida’s population has increased since 2016.
  • New York population over 65: 16.9%
  • Florida population over 65: 20.9%

Market Strength According to Zillows Home Value Index


  • Median Home Value: $305,266
  • 1 Year Price Change (Jun-Jun)- 18%
  • Average Time to sell (Jacksonville, FL): 13 days

New York

  • Median Home Value: $379,475
  • 1 Year Price Change: $13.7%
  • Average time to sell (New York, NY): 66 days

Take Aways

  • Although a rising market has benefitted homeowners everywhere, markets with a lower cost of living may tend to see a steady demand from homeowners leaving higher priced areas.
  • This is a long term trend that has accelerated since COVID 19 freed up workers from a physical workspace. Additionally retirees will continue to Florida over time.

Putting It All Together

The housing market is driven by supply and demand. The demand is driven by mortgage interest rates and mortgage credit availability. The supply is driven by housing inventory and economic trends. Together, all these factors influence the price of your home.

Though we don’t have a crystal ball to see the future, many of these indicators are pointing to a relaxing of the historical conditions that created the strong market of the last year or so. A pull back (or just slowing) of the market in the short term is not a bad thing. It will be nice to be able to buy a place without getting into a bidding war! Over the long term, the data points to this strong market continuing in the future with homes in desirable markets such as Florida appreciating the most over the long term.

If you are considering buying in the future check out the mistakes most first time buyers make.

Interested in learning about more topics like this? Check out our investor community and weekly newsletter that explores where the economy is headed. Don’t worry, they’re both free!

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