Common sense would dictate that high house prices and mortgage rates should have cooled down by now. What goes up, comes down, doesn't it? However, there are many other factors at play that are keeping home prices and mortgage rates high and frustrating home buyers.

Today, Realtor.com® analyses some of the most mind-boggling factors to figure out why the performance of the real estate market is baffling almost everyone who follows it.

Danielle Hale, Realtor.com's Chief Economist, said, "The best illustration of the surprising real estate market in 2023 is to look at what people predicted and what actually happened. The property market is not as strong as we thought it would be".

In the meantime, property experts will continue to make predictions - until the market does the next unexpected thing and those predictions are overturned and revised.

Why haven't house prices fallen?

After home prices have skyrocketed over the past few years, many home buyers have been waiting for prices to come back down. Many prominent real estate professionals predicted that high mortgage rates would force home prices down. After all, there is a limit to what homebuyers can afford.

But that has not been the case.

Sure, median list prices fell slightly in some of the markets that saw the biggest gains during the COVID-19 pandemic. (But across the country, home prices have levelled off, dropping only slightly and then going right back up again.

In some traditionally lower-priced areas of the U.S., including the "Rust Belt" and the Midwest, home prices are soaring. The reason for this phenomenon is that homebuyers who were turned off by high-priced areas are now chasing places they can still afford. Ironically, this is driving up home prices in these areas.

While high house prices and high mortgage rates are huge barriers to home ownership, there are still some buyers who are able to calculate their way to home ownership. With a severe housing shortage, homebuyers are forced to compete for a limited number of properties, further pushing up prices in bidding wars.

"A lot of homebuyers are surprised that prices have held up for as long as they have," Hale said." Demand and supply are relatively balanced, so prices have largely stabilised at very high levels."

Historically, the combination of high home prices and high interest rates isn't as strange as it seems. In the past, higher mortgage rates have been associated with small increases in home prices, says Laurie Goodman, a researcher at the Urban Institute, a think tank.

Typically, when interest rates are high, the economy is doing very well and the U.S. Federal Reserve raises rates to control inflation. When the economy is strong, more people may want to buy homes. The extra competition will drive up home prices.

"In times of high interest rates, there are fewer buyers and fewer sellers," Goodman says." But enough people can afford to buy a home. [Home prices are not falling because of a strong economy."

Instead, the decline is in home sales.

Existing-home sales, which do not include new construction, fell 16.6 percent year-over-year in July. That's the most recent month's data available from the National Association of Realtors®.

Ken Johnson, a real estate economist at Florida Atlantic University in Boca Raton, said, "The market is basically frozen. Transactions are down sharply."

Mortgage rates are also higher than many believe they could and should be.

That's because, while mortgage rates are influenced by the Fed's actions, investors are also largely determining where rates go. According to Freddie Mac, the average rate for a 30-year fixed-rate loan was 7.19% for the week ending 21 September.

Here's where the technicalities come in. Rates could be a full percentage point lower than they are now because of the spread between mortgage rates and 10-year U.S. Treasuries. (The 10-year Treasury bond is often compared to mortgage rates because it is closer to how long many homeowners owned their property before selling it.) The spread is larger than normal, which suggests that there is room for mortgage rates to fall.

Higher mortgage rates reflect "a lot of uncertainty about the future of Fed-controlled interest rates and the economy," Goodman said.

Still on the fence? You also need to consider what's going on in the secondary mortgage market - a series of head-scratching circumstances are also pushing up mortgage rates.

First, once a mortgage is originated, lenders rarely continue to hold on to it because they want to free up cash to originate new loans. As a result, mortgages are often bundled into mortgage securities, better known as mortgage bonds, and sold to investors on the secondary market. When the bonds are less expensive, mortgage rates rise to entice investors to buy them.

Finally, investors are concerned that the Federal Reserve may raise interest rates again, which could also cause mortgage rates to rise. Investors want to be compensated for these potentially shorter loan terms (because of the need to refinance in the future when interest rates come back down), as well as the general uncertainty in the real estate market.

Just a day after the Federal Reserve hinted last week that it could raise rates again this year, mortgage rates spiked to 7.47 percent on Thursday, according to Mortgage News Daily.

Yelena Maleyev, a senior economist at KPMG, said, "Mortgage rates could cool slightly to the 6 or 5 percent range next year." But it could also climb much higher."

Many real estate experts predicted that more homes would come on the market for sale this year, but that hasn't been the case. Instead, sales of newly built homes were strong.

Devyn Bachman, senior vice president for research at John Burns Real Estate and Consulting, said, "Those two things don't usually happen at the same time. There's a logical reason for all this weirdness."

Builders are more successful now because they are holding down mortgage rates, Bachman said. Some of these builders are lowering rates temporarily to 5 per cent, or over the life of a homebuyer's 30-year fixed-rate loan. Builders are also lowering list prices and sharing closing costs for homebuyers.

New homes have historically been priced higher than existing homes. However, the price gap has narrowed, with the median new home price at $436,700 in July, compared to $406,700 for homes on the resale market.

Thus, in some cases, builder incentives and the narrowing price gap may make new construction more affordable than existing homes.

Many of the homes being snapped up are also newly constructed because there are more listings available. Higher interest rates have dampened home inventory, causing many homeowners who would have liked to sell their homes to wait on the sidelines for now.

"We call it the mortgage winter. People are frozen in place," Maleyev said.

If they don't have to move, [because of] a marriage, divorce, death or job change, they think twice about listing their home for sale and moving to a market where interest rates are now twice as high.