Real Estate

Could The Housing Market Collapse Again? Recovery Talk ‘Premature’ After Mortgage Rates Surge Past 7%

Topline

As fears of inflation push mortgage rates back toward multi-decade highs, economists are warning the resurgence in borrowing costs will deal another blow to the precarious housing market, driving home sales to new lows and proving the recent recovery many hoped would mark a turning point may instead be a short-lived “mirage.”

Key Facts

The average rate on the popular 30-year mortgage jumped back above 7% this week for the first time since October—once again approaching the highest levels in 20 years—after a string of worse-than-expected inflation data fueled expectations the Federal Reserve will intensify its rate-hiking agenda.

This surge in rates “dealt a fresh blow” to mortgage demand, says Pantheon Macro chief economist Ian Shepherdson, adding he’s been “puzzled” by claims the housing market is starting to recover and instead expects total home sales will plummet to a new multi-year low by May if rates remain close to 7%.

After collapsing more than 35%, home sales have remained relatively flat since November, but Comerica Bank economist Bill Adams calls the recent respite in the housing market “at least partly a mirage” fueled in part by unseasonably warm weather in much of the country, which helped bolster sales during what is typically the slowest season of the year.

The drag from very high interest rates is “again becoming clear,” says Adams, noting mortgage purchase applications (a forward-looking indicator of sales) plummeted 44% year-over-year in late February to the lowest since 1994.

Comerica forecasts existing home sales will drop more than 20% this year—pushing prices, which have already started to fall, down nearly 10%.

Contra

Others are more optimistic. In a Wednesday note, Wells Fargo economist Charlie Dougherty told clients it’s “unlikely” that housing activity will experience a downturn similar to the one last year, but he acknowledged “persistent inflation stands to deflate the housing market’s renewed optimism.”

Key Background

The latest surge in rates comes after several economists declared the decline in home sales was coming to an end. Late last month, the National Association of Realtors reported existing home sales posted the smallest decline in a year, ticking down just 0.7% from December to January and prompting the association’s chief to say home sales are “bottoming out.” The unexpected rise in rates, however, is now challenging that assertion. “Another challenging year awaits the residential sector,” Wells Fargo’s Dougherty wrote on Wednesday.

What To Watch For

S&P’s Case-Shiller home price index has fallen five months straight and is about 4.1% below its record high in June, but Shepherdson projects home prices could still fall by about 15%, according to historical trends.

Surprising Fact

With higher rates driving down demand, Americans have lost $2.3 trillion in the value of their homes since June, according to real estate brokerage Redfin.

Further Reading

Here Are 20 Major Cities Where Home Prices Are Dropping The Most (Forbes)

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