As Mortgages Spike Dramatically, Should We Expect A House Price Crash? – Forbes

August 30, 2022 by No Comments

PARK RIDGE, IL – JULY 27: What’s does current data suggest about the U.S. housing market? (Photo by … [+] Tim Boyle/Getty Images)

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While the U.S. flirts with recession, one clear loser from the recent round of U.S. interest hikes has been the housing market. What does the data suggest?

First off it’s definitely not that bad, yet. Today house pricing remains strong, year-on-year Zillow has house prices up 18% as of July. Slightly more pessimistically, Redfin’sRDFN
data has house prices up year-over-year, but already starting to dip since June.

It gets worse, though. Other housing data suggests trouble looming. For example, the S&P Select Homebuilders Index has underperformed the S&P 500 by 11% year-to-date, and the performance of building supply stocks have been similarly poor. The stock market is a reasonable predictor of future profits, though, but it doesn’t always get it right.

It’s implying that there are problems with the housing market. Only a handful of stock market sectors have performed worse, such as media, textiles and car parts. However, many lots of factors feed into homebuilders’ profits, so is there an issue with homebuilders themselves, or the housing market more broadly?

Spiking Mortgage Rates

Rising mortgage costs are a concern for the housing market as a whole. Mortgage costs have spiked very fast. Today a 30-year adjustable rate mortgage carries a 5.5% interest rate. Last year it was under 3%. That’s a dramatic rise in mortgage costs. It’s a move that, much like recent inflation data, we haven’t seen since the 1980s.

It’s fair to expect rapid rises in mortgage costs to cool the housing market. For many the constraint when buying a house is not the sticker price of the house, but their ability to pay the mortgage. Rising mortgage rates, may lower the property prices that many can afford.

Other Constraints On U.S. Consumers

Although mortgages costs are crucially important, it’s also worth noting that the resumption of student loan payments next January (even with some debt relief), and the potential risks of U.S. recession may also hit consumer confidence when it comes to house purchases. So there are other negative omens too.

Supply and Demand

Then the supply picture is getting a little worse. According to Redfin supply data, there are now more homes for sale and it’s taking longer to sell them. This is creating an overhang in the housing market. We’re not at crisis levels. Supply is just back to levels from 2020, and time to sell is similar to the worst of 2021. However, this during the summer period which is traditionally seasonally very strong for housing, so things are certainly moving in the wrong direction and the next few months could well be worse.

The Fed

Of course, the Fed likely isn’t done raising rates yet. Expectations are for another move up in rates at the September Fed meeting. However, the good news is that mortgage rates typically price in what the markets think the Fed will do in future. This means that longer term mortgage rates should only …….



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