The real estate adjustment: A major fall in the number of homes sold and built, but not in prices

In theory, the rise in mortgage rates should lead to a significant fall in residential real estate prices, especially as it is nominal and real long-term interest rates that influence real estate prices. However, in both the United States and the euro zone we are seeing: Little or no decline in prices; A very sharp fall in the construction of new homes or sales of existing and new homes, and in demand for mortgage loans. The fact that residential real estate prices have fallen little or not at all, despite the rise in interest rates, is creating a solvency problem for borrowers and preventing many households from buying a home. This lack of a significant fall in real estate prices can be explained by the following factors : Sellers of existing housing are refusing to lower their asking prices; The sale price of new homes is incompressible due to construction costs; The re is a chronic shortage of property supply, which keeps the real estate market in a state of scarcity.