The US housing market has entered bizarro world

"When it comes to the housing market, the laws of supply and demand don't seem to apply any longer," David Rosenberg said.

• The US housing market is distorting a core principal of economics: supply and demand. 
• Home prices soared to record highs in May, even as existing home sales fell and supply of homes for sale jumped.
• "This one is a real head-scratcher," economist David Rosenberg said.

The US housing market has officially entered bizzaro world.

The law of supply and demand is a basic principle of any free market, and right now, it's being subverted by strange happenings in the real estate market.

The supply of homes for sale is rising while demand for homes is falling. And yet housing prices continue to hit record highs.

"When it comes to the housing market, the laws of supply and demand don't seem to apply any longer," economist David Rosenberg said in a note this week.

Existing home sales dropped to a four-month low in May to 4.11 million units, representing a year-over-year decline of 2.8%, while existing homes available for sale soared 18.5% year-over-year in May.

"The unsold inventory backlogs has risen from 2.9 months' supply in February to 3.2 months in March to 3.5 months in April and 3.7 months in May, representing the highest level since June 2020," Rosenberg said.

Yet, despite falling demand as measured by the drop in existing home sales and rising supply, the median home price jumped 5.8% year-over-year to a record $419,300 in May.

"This one is a real head-scratcher. Demand at a four-month low, supply at a four-year high, and prices at unprecedented heights," Rosenberg said.

Part of the disconnect is the fact that real estate is a very regional, localized market, with some areas being stronger than others. Texas and Florida, for example, have seen home prices decline amid a boom in supply of homes for sale.

The other part of the equation has to do with mortgage rates, which are hovering at multi-decade highs at around 7%. That has boxed out a lot of would-be home buyers and locked in would-be sellers who don't want to refinance their next home purchase at higher rates, essentially freezing the market.

But the dynamic of falling demand, rising supply, and rising home prices can't last forever.

"At some point, something has to break down — either interest rates or prices," Rosenberg said.

Some market experts believe housing prices are poised to fall in a big way.

Market strategist Chris Vermeulen highlighted a plateau in home builder activity as a reason to believe that the housing market could experience a major "leg down."

"The reality is that I think we're going to see this collapse," Vermeulen said.

However, others expect home prices to keep rising once the Federal Reserve cuts interest rates. Markets expect the central bank to make the first cut at the September policy meeting, according to the CME FedWatch Tool.

Lower mortgage rates would help ease borrowing costs, but also drive demand as more borrowers rush back to the market.

Famed-investor Barbara Corcoran has said that a decline in mortgage rates will send home prices soaring even higher than.

"The minute actual interest rates come down just one more point, everybody's going to jump into the market, and you're going to be paying a lot more for your house," Corcoran said.