If a mortgage rate is the price of a mortgage, can you explain the rise in mortgage prices using basic supply and demand analysis?

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Mortgage rates are directly related to the supply and demand analysis. Several factors contribute to the demand of mortgage rates, such as an individual's financial health/credit history, economic conditions, and mortgage interest rates.

An individual's financial health and credit history affects the interest rate that he or she will pay on a mortgage. The lowest interest rates are offered to those with an exceptional financial health and credit history. Furthermore, as economic conditions and the housing market improves, demand for homes increases. A recent report by CNBC highlights the sharp demand for homes as the prices of homes declined. As a result, the supply of homes decreased by approximately 3%.

Statistics show that starter homes purchased within the last five years have been reintroduced to the real estate market as rental homes. The strong response to these rental homes means that these homes will not likely be placed back on the market, which further contributes to the shortage of available homes on the market. The demand for homes is being sparked by lower interest rates of mortgage loans. Two years ago, the average mortgage rate was around 6%. Recently, the average mortgage rate has been around 3.5%. This has increased the demand for both newly constructed and older homes. On the other hand, if interest rates increase, the demand for homes will decrease and supply will increase as potential buyers postpone plans to purchase.

The home buying market exhibits the basic principles of supply and demand. Economic conditions drive the force of supply and demand in the housing market. However, an individual's financial health significantly impacts his or her ability to purchase a home also.

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