The price of homes rose again in January as demand continues to outpace low supply caused by high interest rates.
The S&P CoreLogic Case-Shiller index, which measures home prices, reported a 6% year-over-year increase for the month of January. That’s up from a 5.6% increase in December, and it’s the fastest annual rate of growth since 2022. The 10 and 20 city composite indices rose even more, at 7.4% and 6.6% respectively.
On a month-over-month basis, seasonally adjusted prices rose 0.4% nationally.
Despite historically high prices, demand for homes remains large enough to continue driving prices upwards. It is common for homes to have multiple offers and ultimately be sold at or above their asking price. This makes the market great for homeowners and very attractive for sellers. On the other hand, young people and first-time buyers are being priced out, as they cannot compete with the high demand and high offers for what little home supply exists.
John Farrell, a real estate agent in Binghamton, said that the buyers he has been working with keep losing deals on the houses they bid on. In multiple cases, buyers bid and lost deals 3 or 4 times until finally offering $5,000, $10,000 or $15,000 above asking price.
“All it takes is two offers to make an auction, so if you have five, six, seven, 10 offers and somebody pays full price, the price gets driven up,” Farrell said. “It’s a spiral up.”
This trend in the housing market has been the norm since the aftermath of the pandemic, when mortgage rates rapidly shifted from below 3% in 2021 all the way up to 8% in 2023. Rates have come down to around 6.5%, but the supply of homes remains locked up because homeowners with sub 3% or 4% rates don’t want to sell and take on higher mortgages. 
In some cases, prices have risen enough to make selling attractive despite the tradeoff of higher mortgage rates, but this still has not been enough to thaw the frozen supply of homes.
“Housing prices continue to rise, and that’s because the supply is not adequate to the demand. It’s that simple,” said Peter Morici, economist at the University of Maryland. “The situation is not improving and it’s not likely to improve, because this is a long-term structural problem.”
New home construction and sales have increased tremendously in the face of low home supply, but this activity cannot make up for the gap in existing home supply, because existing homes make up a far larger share of the market.
Until recently, economists had been expecting imminent Federal Reserve interest rate cuts, which could have led to lower mortgage rates and reinvigorated the housing market. But recent inflation reports have turned out higher than expected, leading the Fed to delay those cuts. The associated hope that lower mortgage rates would soon unlock supply have diminished as a result.
But Troy Ludtka, economist at SMBC Nikko Securities America Inc, sees reason for home buyers to be a little optimistic. The Case-Shiller index is showing a slowdown in the rate of price growth, and new home prices have outright declined, he said. The message is that home prices and demand are softening, and Ludtka believes this could signal continued disinflation for the rest of the year.
This sounds like good news for potential buyers, but it is only a small step towards normalizing prices. For the housing market to fully correct itself, much larger and more disruptive changes would have to occur.
“Either home prices nationwide need to correct substantially, or mortgage rates will need to fall dramatically, or some combination of the two,” Ludtka said. “The problem is, the only way this happens is if we are in a somewhat serious recession. That’s really the catch-22 of this situation.”
If housing affordability rises due to a recession, the benefits are likely to be outweighed by the troubles. During a serious recession, people are worried about finding and keeping their jobs, not about buying homes.
