Real Estate Fights the Law of Gravity

The U.S. housing market has already begun to lose its momentum as rising mortgage rates have cut demand in cities where prices ran too hot for too long, such as Denver, Los Angeles, San Francisco, and Seattle. If borrowing costs keep climbing next year, eventually real estate’s law of gravity will kick in—and sellers’ expectations will have to come down. “I don’t think higher mortgage rates will deter anyone who has made a decision to buy, but it will push them to sit on the market longer, waiting for the right-priced home,” says Aaron Terrazas, director of economic research for the listings site Zillow. “We’re now six years into above-trend home price growth. Mathematically, it can’t go on forever.”

Housing’s underlying affordability problem was unmasked by 2018’s 1 percentage point jump in rates for 30-year loans, to almost 5 percent. The added cost was a blow to some buyers in expensive markets who already were stretching. In September, sales of new and existing homes plunged 18 percent in Southern California from a year earlier. They fell 19 percent in the San Francisco Bay Area, to the weakest pace since 2007.