Historically-low mortgage rates are the primary driver of the red-hot housing market, according to one expert.
"The low mortgage rates basically drive what we refer to as house-buying power," Mark Fleming, chief economist of First American, told Yahoo Money. "How much home can you afford to buy? Well, a mortgage rate of 3% or 3.5% means you can buy an awful lot of home."
Before the global financial crisis, mortgage rates ranged from 4.5% to 6%, then near-record lows. But rates sank lower after the Great Recession, especially as the Federal Reserve kept its benchmark interest rate near zero to spur economic growth.
"We've had mortgage rates in this very low range for about a decade now, so we've been stimulating house-buying power and demand for a very long time since the global financial crisis," Fleming said.
However, the low rates have exacerbated another problem in the housing market: a lack of homes for sale.
Many existing homeowners have been able to refinance their mortgages and lock in rates as low as 2.5% to 3%, a move that "discourages them from bringing to the market supply," Fleming said.
Existing home sales dropped in May for the fourth consecutive month, marking the slowest annual pace since June 2020. The market is weighed down by low inventory and high prices: The median sales price again hit a record high of $350,300, eroding much of the affordability that low mortgage rates provide.
And so while the Fed has signaled it won't increase its fed funds rate until 2023, which would put upward pressure on all interest rates, Fleming expects that mortgage rates will ultimately increase again from the lows that buyers now take for granted.
"We've gotten used to it, we've set our expectations around it," he said, noting that higher rates would help cool price appreciation as well. "That said, people will still buy homes. It's not purely a financial decision to sell or to buy."