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High home prices fueled by low cost to borrow

We are in another housing bubble, with home prices way above the peak of the last bubble in 2006, according to the Case Shiller Home Price Index.

Even when considering inflation, home prices are higher nationally that the last peak. Moreover, Hawaii still ranks as one of the most unaffordable states in the U.S.

We hear all sorts of reasons for high home prices, but the indisputable culprit is the very low cost to borrow. This was clearly demonstrated when the Federal Reserve Bank intervened monetarily just after COVID-19 struck. At one point, mortgage rates dropped below 3 percent. This fueled demand for homes when inventory levels (homes for sale) were already low pushing up home prices even further.

The very low levels of inventory have puzzled pundits, but the answer is in plain sight. Homeowners aren’t selling, and the reason they aren’t selling is because home prices are too high. It is a paradox. The less homes there are for sale, the fewer homeowners will list their homes. Diminishing choice and resultant bidding wars means overpaying.

Also, high home prices have ramifications for downsizing, property taxes and capital gains tax to name a few.

There is a very clear inverse relationship between interest rates and valuations. With current high inflation putting pressure on interest rates to rise, an increase in mortgage rates will put downward pressure on home prices, putting many homeowners into negative equity, a leading cause of foreclosure. Mounting foreclosures in turn will affect credit markets.

Victor Saumarez

Lahaina

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