As Mortgages Spike Dramatically, Should We Expect A House Price Crash?
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’s
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.
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 move up if the Fed raises rates more than expected, and could actually fall if they raise rates, but less than the market thinks. However, there is still a risk that into 2023 if the Fed continues to raise rates, then mortgage rates could rise further since the markets are not sure which way the Fed will move in 2023.
So the stock market is getting worried about housing, and that may be in part because mortgage rates have moved up very fast. We’re starting to see houses take longer to sell and more homes are available. This suggests that house prices could start to soften after a strong run.
However, it’s also worth the reality check that we are only just starting to see house prices soften and they remain up year-on-year. Also, house prices tend to be fairly stable. An extremely bad housing market, historically speaking, one where prices fall about 10% such as in 1970s or during the financial crisis of 2008-9. So compared to the stock market, negative swings in house prices are fairly small.
House prices have had a very strong run recently. There are a lot of good reasons why that may be starting to moderate. Although history reminds us that U.S. house prices do tend to be fairly stable. That time in the 1980s when mortgages spiked similar to today? Well house prices only had one quarter of price declines for that entire decade, and that was under a 1% decline.
So yes, house prices may no longer rise double-digits. In fact, a lot of signs suggest things in housing will get worse. However, do remember that what is really bad for the housing market is seldom amounts to even a single-digit decline in house prices, if history is any guide.