Why is the housing market expensive? The economist blames the baby boomers.

A real estate expert shares the current state of the market.

The current real estate market contradicts expectations of a decline in property prices caused by rising mortgage rates this year. Instead, prices and demand remain stable, confusing experts and making it difficult for many young buyers looking to purchase their first home. The reason can be found in the "fault of the boomers," according to one Wall Street economist. This may seem paradoxical, acknowledged senior economist Jonathan Millar of Barclays in his research published on Thursday. Many had assumed that an aging population would require less housing, but that is not the case. Boomers are actually creating more households, putting pressure on housing demand and keeping prices high, despite the highest mortgage rates in the last 20 years. Boomers are forming more households partly because they are getting divorced or remaining single after the death of a spouse, Millar notes. "Typically, as people age, the likelihood of becoming a head of household increases, and this probability is highest after retirement," Millar writes. "Thus, as a larger share of the population moves into older age groups, more households are formed."

However, according to other experts, the real estate market is also affected by other issues, including a lack of supply. Due to the rise in mortgage rates this year, fewer homeowners are putting their houses up for sale, fearing they will have to buy new homes at a rate of 7% or higher, which is double the usual rate during the pandemic. Limited supply means that buyers are competing for a limited number of homes, which drives prices up.

Household formation is one of the driving factors in the real estate market. It occurs when a person living with others moves out and becomes the head of a new household.

At the same time, the U.S. is facing a shortage of affordable housing to meet the demand of people wanting to move into their own homes. This is putting pressure on prices and partially explains the phenomenal price increase this year. The average sale price of existing homes rose by 1.9% in July to $406,700 compared to the previous year, although prices dipped slightly at the beginning of the year, according to data from the National Association of Realtors. This marks a 57% increase since January 2020, before the pandemic, when the average sale price of existing homes was $266,300.

Millar predicts that the demand for housing will continue due to the demographic characteristics of aging boomers. And while new housing construction may help increase supply and ease price growth, real estate may still continue to gradually appreciate, he notes. Prices are likely to "slowly decelerate," reaching an increase of about 2.5%, the expert adds. However, if the Federal Reserve lowers rates in 2024, it could stimulate more purchases, as a lower interest rate may encourage more people to enter the market.

Of course, not everyone agrees with Millar's reasoning. Capital Economics predicts that demand for housing may be weak in the coming months. "Given that affordability is limited and the economy is slowing down, activity in the real estate market is expected to be weak in the coming quarters," said Imogen Pattison, an economist at Capital Economics, in a new report. "Although we expect housing prices to lose some momentum, the worst of the correction seems to be behind us, and we do not anticipate any further sustained declines."