Home prices have hit record levels across America, despite the high cost of mortgages. Or, analysts think, because of it.

According to Zillow, the average cost of a home in the United States dipped marginally from last summer to this spring. As of June, however, it’s higher than it’s ever been before – just below $350,000.

The most remarkable thing isn’t how expensive houses are, but how expensive houses are considering how expensive it is to borrow.

As of this writing, the average 30-year fixed-rate mortgage across the United States sits just below 7% – the highest it’s been since 2002. And yet, homes are still yielding higher and higher prices.

Higher interest rates home prices

Orphe Divounguy, senior economist at Zillow, acknowledged this backwardsness to CNN. “It’s creating a lot of confusion,” she said, but explained that there’s a good reason behind the trend.

How higher mortgage rates are making homes more expensive

After inflation reached heights unseen in half a century in 2021-22, the Fed's raised interest rates at the fastest pace since the 1970s.

Interest rates affect the economy by adjusting the cost of borrowing throughout the economy—whether it be business loans, or payments for credit cards, cars, or mortgages.

High interest rates mean more expensive mortgages, which discourages prospective home buyers. One might assume that with lesser demand, home prices would decline.

Why, then, are homes more expensive now than when mortgages were many times cheaper?

Because while high rates apply downward pressure on demand, they also apply equal, upward pressure on supply.

Len Kiefer, deputy chief economist at Freddie Mac, put the matter in simple terms.

“Many existing homeowners,” he posited, “find it difficult to give up a mortgage under 4% to trade for one over 6%.” Spooked by higher rates, homeowners are leaving less inventory on the market.

Only just over 600,000 homes are presently listed across the country, less than half the already-low numbers from just four years ago.

The “low flow of listings paired with the demand for homebuying in the spring,” Divounguy says, will likely see prices remain high for the foreseeable future.

Ironically, such high prices give existing homeowners yet another reason not to move, creating a virtuous cycle.

Will it ever get better?

Historic housing unaffordability has become a fact of life since the Great Recession.

The millennial generation, in particular, has missed out on this central aspect of the storied American dream, with broad implications for their families, politics, and general way of life.

Many now jokingly (or not) hope for a housing crash like 2008’s.

Unfortunately, at this moment, the chances of a housing crash seem slim. For one thing, investors increasingly view real estate as a safe investment asset, inspiring Americans as well as foreign buyers to snap up the available supply.

The lack of inventory is exacerbated by high mortgage rates, as we’ve seen, and the propensity for homeowners to band together to block development in their neighborhoods.

So whether mortgage rates go one way or the other, until more houses are built, the cost of existing houses may only go up.

If there’s good news to be found, it’s that the extreme pressure on housing inventory has been a boon to many homebuilders. The biggest names in the industry have been some of the best buys in 2023, thanks to the overwhelming need for their services.

So the question is: can we build houses fast enough, or will the country continue to fight over scraps?