I have seen a lot of people cheering the recent drop of home prices. Throughout the economy, inflation has been a problem, especially in housing. However, this recent drop is not because homes are becoming more affordable. This is not a natural result of supply and demand indicating an increase in the number of homes available.

What’s happened is that the federal government raised the interest rates. Because of the high interest rates, people buying homes with a loan can no longer afford homes that used to be in their price range.

Here is an example. An entry level buyer finds a house for $350,000. Minus a $70k down payment, they need a 280k loan. With an interest rate of 3% (last year) they would have had a $1180 monthly loan payment, but with an interest rate of 7.5% ( today’s rate) that number jumps to $1958. If the price of the house now drops to 300K, they still have a payment of $1608.

This is hitting the affordable home market the hardest because entry level homes usually are bought with the highest percent of loan as there is no equity to roll over. This is discouraging for people that are renting and trying to get into a starter home. They can see that prices are dropping, but they can’t participate because the increased interest levels on loans are increasing their monthly payments. This is also affecting those trying to upgrade to a larger home because they are seeing their primary investment lose value.

Those actually profiting are wealthy individuals and corporations who already have cash and now can buy homes at cheaper amounts, so they are scooping them up. It’s a boon to the rental investment market at a cost of the lower participation in home ownership. Further, the artificial drop in price will discourage current investors from building more affordable housing as their profits will drop due to the high bank rates potential first-time buyers now face.