I think it's going to take some time to settle a bit. Even though interest rates are high, the US is very low on housing stock and very low on labor. If there's a lot of demand for new units and very little labor to build new units, then they might not see business slow down.

Likewise, rates have dropped a decent amount from their highs earlier in the year. Zillow seems to indicate that rates have dropped around 0.7 percentage points (like 6.9% to 6.2%). I think a big issue is that people don't believe the Fed will keep rates high for more than 12-18 months. If rates are already calming down and you don't believe the Fed will make it impossible for people to buy/sell homes for the next 5-10 years, then the interest rates don't matter that much so we aren't going to see a dip in demand because people don't actually believe they'll be paying the monthly that they're signing on for.

Let's say that the Fed pushes rates 1-1.5 points higher and we see 8% mortgages. Let's say the Fed keeps mortgages at 8% for the next 5 years. We'll definitely see a huge shift in the housing market. A $750,000 place is $2,530/mo at 3%, $3,675/mo at 6.2%, and $4,403/mo at 8%. Right now, people are thinking "I have to spend an extra grand a month for a year and then refinance it." If that becomes, "I'm going to have to spend an extra two grand a month basically forever," that changes things a lot.

People's perceptions matter. Everyone is assuming that the 3% mortgage is coming back soon. I'm not criticizing those people - I also think the 3% mortgage is coming back. I think it's politically kinda impossible for it not to come back - we'd be locking a generation out of home ownership even more than they already are and we'd be locking people into their current housing since if they sold and bought a new place at the higher rate, they'd be paying so much more for the same quality housing. In the reality created by our collective perception, we're all continuing to value things at those prices.

Literally, the Fed hasn't lowered interest rates. It has continued to increase rates, but banks seem to be betting that won't last long and so mortgage rates are falling a bit.

I'd also note that the two of you might be comparing different things. You're talking about you building a home for yourself with (presumably) a 30-year mortgage. The other person might be talking about a contractor buying a house with a loan, refurbishing it over 6-18 months, and selling it. In that case, the long-term interest prospects don't matter. In fact, the high interest rates may have put a damper on how much people will pay for premium places while simultaneously making his job a lot more expensive. 6.2% vs 3% basically means $37,000 in interest vs. $18,000 for the first year. If you're looking to put $100k into the house and sell it for $200k above what you bought it for, an extra $18k expense really cuts into your profits - especially if closing costs are going to be $30,000-60,000. You might flip a place faster than a year and it's only $10-12k in interest for a 6-month flip, but regardless it's taking a sizable chunk out of your profits.

Right now, I think a lot of buyers looking at 30-year mortgages expect to refinance in late-2023 or maybe 2024. However, the Fed is projecting rates to climb from 3.8% to 4.4-4.9% in 2023 which should see mortgage rates hit 7.5-8% - with Federal Funds rates probably only returning to around 3.8% in 2024 and around 3% in 2025 (with mortgage rates sticking around what we're seeing now).

I'm skeptical simply because it's going to cause so much chaos in the housing market. Yes, the Fed is meant to be independent, but they would be effectively locking current home owners in place and making it extremely expensive for new homebuyers while stalling a lot of construction that's desperately needed.

Still, there's a definite possibility that rates will remain high. In fact, the people we literally put in charge of this are saying that rates will remain high through 2024, in their estimation (and they set those rates, but of course conditions might change which would change their minds). If/when that reality sets in, I think we'll start to see much larger impacts.