Two Charts Show Us What’s Next for the US Housing Market

This spring, the Fed wiped out its previous anti-inflation policy. Central banks put upward pressure on long-term interest rates, including mortgage rates, by signaling that short-term rates will rise soon. These mortgage rate spikes will depress both home sales and home construction. This reduces demand for commodities (such as wood and concrete) and durable goods (such as countertops and refrigerators). These contractions then spread throughout the economy, theoretically helping to keep inflation under control.

Of course, the housing adjustment phase has already begun.

Across the country, home shoppers are pausing their home search. Year-on-year, new home sales and existing home sales are now down 29.6% and he 20.2%. And the detached house started, Home loan purchase application They are down 18.5% and 23% respectively. Simply put, housing activity is rapidly shrinking.

The housing adjustment, the housing recession, the housing slump, whatever you call it, it’s not over yet. Just look at mortgage interest rates. Heading into 2020, average 30-year fixed mortgage rates remained at 3.1%. That was long ago. It climbed to 6.23% on Thursday, making him the second highest mortgage rate in 2022.

If a borrower takes out a $500,000 mortgage at an interest rate of 3.2%, their monthly payments will be $2,162. If the interest rate is 6.23% for him, the monthly payments will be $3,072 for him on a 30-year loan. These rising mortgage rates, combined with bubble home prices that surged 43% during the pandemic, are making new monthly payments simply unaffordable for many would-be buyers. Other households (see chart below) lost their mortgage eligibility altogether.

As long as both mortgage rates and home prices remain this high, industry insiders say the housing market will continue to languish.

Earlier this week, Goldman Sachs released revised forecasts. The investment bank now forecasts that residential GDP will fall by 8.9% in 2022 and another 9.2% in 2023. This marks the first housing market downturn since the global financial crisis. culprit? Affordability crisis triggered by soaring mortgage rates (see chart below).

Bad news for buyers? It could be a while before interest rates ease significantly.

“We expect fixed rates to average 5.5% by the end of the year,” said Mark Zandy, chief economist at Moody’s Analytics. luck.

As the U.S. labor market begins to weaken, financial markets should start easing mortgage rates, Zandi says. Theoretically, the combination of a weaker labor market and lower inflation should allow the Fed to ease its inflation struggle. But wages could rise further if the overheated labor market persists.

“Of course, if the job market remains resilient, the Fed will have to tighten more aggressively than the market is expecting, and mortgage rates will have to drop. [would go] Higher and ultimate damage to the housing market [would be] Bigger,” Zandy points out.

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