With home prices skyrocketing, any rise in rates knocks even more potential buyers out of the running, and yet somehow the housing market is more competitive than ever, according to CNBC.

The rate is the same now as it was a year ago. The difference from a year ago, however, is that home prices are soaring. Prices are now up over 10% from this time in 2020, according to CoreLogic, and there appears to be no letup in the gains. This is due to the record low supply of homes for sale. 

Homebuilders are not stepping up as much as hoped, because they are facing higher costs for land, labor and materials. They also continue to experience delays in getting materials to job sites, due to Covid. Single-family housing starts came in much lower than expected in February, and the backlog of unbuilt homes is rising.

"There has been a 36% gain over the last 12 month of single-family homes permitted but not started as some projects have paused due to cost and availability of materials," said Robert Dietz, chief economist of the National Association of Home Builders. "Single-family home building is forecasted to expand in 2021, but at a slower rate as housing affordability is challenged by higher mortgage rates and rising construction costs."

New homes already come at a price premium to existing homes, so rates are particularly important to that market. The supply crunch of existing homes is only exacerbated by higher mortgage rates. Homeowners who sell would likely have to buy their next home at a higher interest rate, so that's a significant deterrent to moving.

While this situation makes it harder for buyers, it also shows that buyer demand has not fallen off much, even in today's higher rate environment. If buyers had fallen back, the supply would be rising.Just over a third of homes sold in February went for more than their original asking price. 

"This is the strongest seller's market since at least 2006," said Daryl Fairweather, Redfin's chief economist. "Buyers outnumber sellers by such a huge margin that many homeowners are staying put because they know how hard it would be to find a place to move to."

A 3% mortgage rate may be the new norm

Rising mortgage rates typically signify a recovering economy, and despite applications for mortgages dropping week-over-week, according to Sam Khater, Freddie Mac's chief economist. Khater expects a 3% rate to sustain market interest for many potential buyers.

As reported by HousingWire, a number of economists say rising rates may just be what the industry needs to cool the insane housing demand the market has been struggling to maintain for months. Increased inventory was the initial hope. However, due to consistent materials supply shortages and lumber prices that are up about 200% since April 2020, builders' confidence index dropped in March. Single-family housing starts declined last month.

"The elevated price of lumber is adding approximately $24,000 to the price of a new home," said NAHB Chairman Chuck Fowke. "Though builders continue to see strong buyer traffic, recent increases for material costs and delivery times, particularly for softwood lumber, have depressed builder sentiment this month. Policymakers must address building material supply chain issues to help the economy sustain solid growth in 2021."

Mortgage rates remain near historic lows (they are still 0.8 percentage points below the 2019 average), but if the price of housing can't cool in time, many first-time homebuyers may miss the chance to take out a record low rate. Despite this risk, Fannie Mae's baseline view is that the recent rapid rise will not continue but that rates will drift only modestly higher over the remainder of this year.

Homebuilders are slowing production despite wild demand

The latest report from the U.S. Census found that new home starts from homebuilders fell a staggering 10.3% from January, and 9.3% from February 2020, reported by HousingWire.

The culprits? High building material costs and low inventory, dueling problems that continue to plague homebuilders into the second quarter of 2021.

"Builders are slowing some production of single-family homes as lumber and other material costs, along with interest rates, continue to rise," said Chuck Fowke, chairman of the National Association of Home Builders (NAHB). "Shortages of lumber and other building materials, including appliances, are putting future construction expansion at risk." 

"It's important to keep the bigger picture in focus and not overreact to what may turn out to be a one-month blip," Speakman said. "The monthly decline in permits, the largest one-month decline since April, and downshift in starts can likely be attributed at least in part to the severe winter weather. And despite the monthly declines, both permits and starts are still near their highest levels in more than a decade."

First American Deputy Chief Economist Odeta Kushi reported a month-over-month increase of 5,300 residential construction building jobs. This, Kushi said, is an indicator of long-term future housing supply.

"Nothing sells like a shortage," Kushi said. "Consider the impact of construction labor on the velocity of new home construction. The growth in residential construction jobs supports further improvement in the pace of homebuilding because building a home does not readily lend itself to outsourcing and automation. Residential construction employment is easing as a headwind to future housing starts."

Weekly Mortgage Rate Update

As expected, mortgage rates continued to inch up but are still hovering around three percent, keeping interested buyers in the market. However, residential construction has declined for two consecutive months and given the very low inventory environment, competition among potential homebuyers is a challenging reality, especially for first-time homebuyers.

The Freddie Mac weekly survey shows the average rate for a 30-year fixed mortgage is 3.09%, which is 0.04 points higher than last week, and down 0.56 points from this time last year.