On Wednesday, the U.S. Federal Reserve raised its benchmark interest rate by 25 basis points, in line with the expectations of most Wall Street economists, marking the 11th hike in the last 12 Fed meetings. The benchmark rate is now at a 22-year high of 5.25-5.5 per cent.

Cantu is fortunate that she hasn't reached the point where she has to sell her home. The house she bought for $700,000 is fully paid for.

She hopes to buy it with cash and a partial mortgage at the current mortgage rate. She said her "ideal" interest rate is 3 to 4 per cent, but acknowledged that those rates were historically low during the pandemic. But Cantu said she has accepted the new normal of higher rates, given that 30-year mortgage rates are now hovering above 7 per cent, more than double what they were two years ago.

But the house-hunting process has hit a major bottleneck lately. Cantu told MarketWatch that a few weeks ago she made an offer on a house - the only time she's ever come close to buying a house she really wanted - only to be outbid.

"It was listed at $699,000," Cantu said of her $715,000 bid." Someone outbid us," she said.

Cantu's brush with the hot post-Pandemic real estate market, where inventory has been so low that homebuyers are once again scrambling to buy homes-reveals how mortgage rates are pushing the U.S. housing industry into a fundamental supply-and-demand problem.

Demand continues to hold steady as homebuyers adjust to the new normal of rising interest rates. However, housing inventory is at an all-time low, with less than a million single-family homes listed for sale on the market.

The reason for this shortage is that the vast majority of homeowners currently have 30-year mortgages, well below the current interest rate of 7%. There is little reason for them to sell their homes, as doing so may require purchasing another home with a higher mortgage.

As of Wednesday morning, the average 30-year rate was 7.04 percent, according to Mortgage News Daily. Mortgage purchase applications fell 2.5 percent, according to the Mortgage Bankers Association, which reflects how many people have purchased homes with mortgages.

According to the Atlanta Fed, high interest rates and high home prices across the U.S. have driven the cost of homeownership up significantly from a year ago. According to the Fed's calculations, for a family with a median annual income of about $76,000 to purchase a home with a median price of $357,000, they would have to spend 41 percent of their income on housing.

Experts advise homebuyers to forget what they saw during the pandemic when it comes to interest rates.

Melissa Cohn, regional vice president at William Raveis Mortgage, told MarketWatch, "I don't think people should expect mortgage rates to go back to the 3% range. We all have short-term memories when it comes to pre-COVID rate levels."

For those keen to sell or buy a home three years after the pandemic pushed rates to record lows, they should lower their expectations.

Lisa Sturtevant, chief economist at Bright MLS, told MarketWatch, "There's no way mortgage rates are going to go back to 3% in our lifetimes, it's just not going to happen." Unless something catastrophic happens again.

The good news: Rates are expected to fall over the next few years, but not to their most recent low in December 2020 of 2.71%. In its July housing forecast, Fannie Mae said it expects 30-year home rates to fall below 6 percent by the end of 2024. While many homeowners and homebuyers may be discouraged by this prediction, experts say that people will likely adjust to a higher interest rate environment as their circumstances change and selling a home becomes more imperative.

What is a "normal" mortgage rate for homebuyers?

Just how low do interest rates need to be to drive people back into the housing market?

Cohen says Americans must adjust their expectations. Homebuyers will tell you that rates have to be 3%, but that's not the reality.

We have to take interest rates during a pandemic out of the equation so we can get back to a healthy real estate market," she adds.

A healthy property market looks a lot like the US property market between 2015 and 2019, when interest rates were between 3% and 5%." Interest rates back then were low enough for people to think, 'This is a good deal. I can afford it,'" Cohn explains.

Matthew Ricci, a Rhode Island-based home loan specialist at Churchill Mortgage, told MarketWatch that a more realistic range of 30-year fixed rates that would be helpful to homebuyers is 4.75 to 5.25 percent. In that range, he added, "you're going to start seeing inventory increase."

New research from John Burns Real Estate Consulting in April suggests that a "magic" rate of 5.5 percent on a 30-year loan would be enough to drive more homebuyers to purchase a home.

The firm surveyed more than 1,300 homeowners and renters and found that 71 per cent of potential homebuyers planning to use a mortgage to purchase their next home said they would be reluctant to accept an interest rate higher than 5.5 per cent.

In fact, 62 per cent believe that "historically normal mortgage rates" should be less than 5.5 per cent.

What kind of mortgage rate would encourage homeowners to sell their homes and buy again?

On the flip side, what would get homeowners who won't be buying another home at full price to sell their homes and get the number of new listings to increase?

Sturtevant says a 30-year fixed rate of less than 6.5 per cent could entice homeowners to start selling their homes, especially if they take advantage of the dramatic rise in home prices over the past three years and use home equity to reduce the size of their next mortgage.

Many homeowners who sell their homes can use the proceeds from the sale of their current home to pay for a new one. First-time buyers, on the other hand, must borrow a six-figure mortgage at 7 per cent.

So with rates approaching 6 percent, "I think we're going to start to see new listing activity start to increase in the second half of the year," she added.

Sturtevant notes that homes, like Cantu's in the Seattle metro area, have appreciated significantly over the past few years. As a result, homeowners can tap into that equity if they choose to sell.

In addition, money and interest rates are only part of the problem, Sturtevant says: No one is going to get excited about swapping a super-low mortgage rate for one that's higher than 6 per cent, but the sale of their home is about more than just finances.

There are a lot of families and individuals living in homes that aren't right for their families right now, she added. Empty nesters, for example, are more likely to be focusing on retirement, and they may want to downsize their property and take out fewer, if any, loans. In this case, selling the property may be a wise move.

Others, like Cantu, rent their existing home and buy another, Cohen said. Some, she adds, "have low interest rates, so they can make a good profit on the rental income."

Ritchie said most of his clients are first-time buyers, people relocating for work, or landlords who are cashing out." Most people won't sell their home unless they have a need to sell," he said." Or they are in a situation where they own multiple properties.

Cantu, a homeowner from Washington, D.C., bought her current home for $700,000 with her husband, who died in 2021, she said. She says her house is now worth closer to $1.2 million, according to real estate agents' estimates. But she still doesn't want to sell.

"I don't want to sell to a developer for $1.2 million. I would love to rent to families in need at a reasonable price," Cantu said. What kind of tenants would she want to rent to?" Someone who has had to leave the area because of the crazy price increases over the last four years," she says.

But being outbid on her first offer forced Cantu to face a tough property market." She says: "It broke me down a little bit because I realised I might have to find a place that needed fixing.

It's frustrating, but I'll keep looking, says Cantu.