We just witnessed a phenomenon that would have seemed unthinkable only two years ago.

The national average 30-year mortgage rate reached 8%. That’s the highest level in more than two decades. And it’s around 2.5 times higher than the prevailing rates just two years ago.

As if that wasn’t crazy enough… home prices are back on the rise – even in the face of multidecade-high borrowing costs.

We know this because one housing benchmark just turned positive for the first time in months. And it’s not the only measure showing the same reversal.

The outcome is simple… Interest rates won’t crash the housing market. Instead, a sustained rally is likely underway.

Let me explain…

Housing affordability has collapsed in the U.S. Specifically, with the roughly 2.5 times increase in rates we’ve seen, it now costs around 80% more to borrow the same mortgage amount than just a couple of years ago.

Under normal circumstances, we’d expect home prices to fall in response…

But these aren’t normal circumstances.

Instead, we have a systemic undersupply of homes in the U.S. We spent most of the past decade underbuilding. And now, the number of homes available for sale has fallen 72% from the high in 2007.

It’s a massive imbalance in supply and demand. So, despite the affordability nightmare plaguing homebuyers, prices haven’t crashed.

That doesn’t mean they didn’t drop. One benchmark for home prices is the S&P CoreLogic Case-Shiller 20-City Composite Home Price Index. It peaked in June 2022… And it still hasn’t returned to that high.

However, housing prices are seasonal. Home values go up in the spring and summer when selling spikes… And they drop in the winter when activity falls.

That seasonality is why you need to look at year-over-year changes in price to see the underlying trend. And by that measure, home prices just turned positive. Take a look…

The year-over-year change for this index turned negative in March of this year. But it didn’t stay that way for long. The most recent data point is from July. And it shows the change in home prices turned positive… increasing 0.1% versus July 2022.

That’s far from a powerful rally. But given all of the woes in housing, any price increase is still hard to believe. And another major housing indicator confirms this trend…

The National Association of Realtors builds a similar index of the median price of existing-home sales. It turned positive on a year-over-year basis in July as well. And the index has been positive every month since.

In short, home prices did take a minor dip. But they’re moving higher once again.

That might be a tough idea for most folks to get their heads around. You might still assume a major decline is coming. However, the housing market has already absorbed a massive increase in borrowing costs… And it hasn’t mattered yet.

Plus, as we’ve covered again and again in DailyWealth, this market has a major structural problem: a historic undersupply of housing. And that means it would take a calamity to cause a housing crash.

Anything is possible. But home prices are on the rise again, despite the headwinds in real estate. That’s a reason to expect home prices to stay high in the years ahead.

Good investing,

Brett Eversole

Strange change at your bank [sponsor]
At least 41 major US banks have just made a drastic change to the way money in America works. It could have some major implications for you, your money and your retirement. But it's crucial you understand what's happening, before these changes get applied to your bank account. Here's everything you need to know.

Source: Daily Wealth