The financial shock hitting the housing market is getting bigger – 6% mortgage rates look close

The financial shock hitting the housing market is getting bigger – 6% mortgage rates look close

The good news: The US Federal Reserve has the tools to curb dramatic inflation. The bad news: These media are therefore blunt and will hit some sectors harder than others. Among the most vulnerable: the US housing market.

Just look at the story. The inflation period that took off in the 1970s was suppressed by the Federal Reserve. But this only happened after the central bank pushed interest rates so high that mortgage rates exceeded 18% by 1981. This led to housing construction halving by 1982.

Fast forward to 2022, and the Fed is once again in a state of anti-inflation. Immediately, the financial markets began to push mortgage rates higher. Indeed, between December and April, the average fixed 30-year mortgage rate rose from 3.2% to 5.1%.

However, last month this rise in mortgage rates seemed to be flattening out. It actually fell for a period of three weeks in May. Well, that was until Friday, when it started accelerating again. The higher-than-expected Consumer Price Index measure, which reached a 40-year high of 8.6%, put the financial markets in turmoil. By the end of Friday, the average fixed mortgage rate for 30 years was 3.85%.

“I do not think we have seen the end of bond yields,” said Mark Zandi, chief economist at Moody’s Analytics. Historically, mortgage rates follow the trajectory of a 10-year bond yield. If the 10-year-old really goes higher, says Zandi Luck that we could see mortgage rates exceeding 6%.

A 2.75 percentage point rise in mortgage rates last year – most of it in the last six months – is historically rare. You have to go back to 1981 to find out the last time mortgage rates rose so fast.

The rapid jump in mortgage rates was a financial shock to the housing market and a huge blow to home buyers. If a borrower in June 2021 mortgaged $ 500,000 with a fixed interest rate of 3.1%, he would see a monthly capital and interest of $ 2,135. At 5.85%, this monthly payment would be $ 2,950. This is a 38% higher monthly payment. During the 30-year loan, it is an additional $ 293,264 in total payments.

It is also a bad example. Why; Last year, house prices jumped by 20.6%. Simply put: A borrower could not get the same house for $ 500,000 now as he could a year ago. For this reason, let’s say the $ 500,000 home loan increased by 20.6% to $ 603,000. With a fixed interest rate of 5.85%, the monthly principal and interest payment on a $ 603,000 loan is $ 3,557.

The rapid rise in mortgage rates combined with the historic rise in US house prices – which have skyrocketed by 36.8% since the pandemic began – is why the US real estate market is slowing. Many borrowers, who have to meet the strict debt-to-income ratios of the lenders, have lost their eligibility for mortgages or simply refuse to pay as much dough. Regardless, it has the US housing market in what Zandi calls a “housing correction.”

We are already seeing both existing home sales and new home sales fall — fast. On Thursday, Freddie Mac’s deputy chief economist, Len Kiefer, tweeted that the downturn in mortgage applications meant “the U.S. housing market is in the early stages of its most significant contraction since 2006.”

Check out this interactive chart at Fortune.com

We also see relaxation raising stock levels.

As the real estate boom took off during the pandemic, stocks plummeted to a four-decade low. This March, national stock levels in Zillow were 64% lower than in March 2019. But as the housing market begins to move into “cooling” mode, the stock is growing again. Between March 26 and May 7, stock levels nationwide increased by 10%. This included a 54% increase in inventories in Coeur d’Alene, Idaho, and 49.6% in Reno, Nevada.

“The best part of the 2022 housing history is the rise in stocks, as this will put home sellers and builders in control. They were overpriced and pushed prices too high,” said Logan Mohtashami, chief analyst at HousingWire. .

Even when the housing market cools, Mohtashami says, there is still very little stock in the market. Indeed, the vast majority of peripheral housing markets (see chart below) still have stock levels that are more than 50% lower than pre-pandemic levels. If mortgage rates start falling again, he says, narrow stock levels could see the frenzy return.

Check out this interactive chart at Fortune.com

Is it possible for the housing market to shake off this slowdown and return to a booming state? Zandi does not believe it. This loosening of the casing is due to the design – the Fed is thinking if it can slow down the housing explosion, it can slow down inflation. On this front, Zandi says the Fed is likely to be pleased with the housing cooling that began in April.

Moving forward, Zandi expects the national rise in house prices on an annual basis to be stable at 0% and significantly “overpriced” housing markets will see house prices fall by 5% to 10%. Of course, even a 5% to 10% drop in price is not a financial relief for homebuyers — at least not if mortgage rates actually exceed 6%.

If you’re hungry for more housing data, follow me on Twitter at @NewsLambert.

This story was originally featured on Fortune.com

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