Powered by 13 Years of Easy Monetary Policy and Fiscal Stimulus, America’s Strong Housing Market Looks to be Slowing Down, At Least for Now

The average rate on a 30-year fixed-rate mortgage jumped to its highest level since 2009 recently, averaging 5.27% for the week ending May 5th.1 This coupled with increasing inventory, could help to spell the end of a monumental multi-decade bull-run in America’s housing market.

Historically homes in the U.S. have, and will over the long-run most likely continue to, appreciate in value. Even with the 2008 financial crisis factored in, U.S. homes appreciated 106% in value since 2000.2 While I expect this trend to continue to play out over the coming years, the next 18-to-24 months may prove to be a bit more unpredictable.

Higher mortgage rates will undoubtably present the greatest burden for aspiring homeowners. When the average 30 year fixed-rate mortgage rate reached 5.1% in the week of April 28th, that was up over two percentage points from the start of 2022. This means that for someone purchasing a $350k home with a 20% down payment, they would have to pay an additional $3,900 in debt service.3

According to Zillow, the median gross household income for a homebuyer is $87,500 per annum, so while surmountable from many, having to pay an additional $3,900 in debt service to finance a home purchase will undoubtably push some prospective buyers out of the market.4

Another interesting piece of data that has come out over the last few weeks is the improving supply of housing on the market. While this could help to ease the effects of the cost-of-living crisis, increasing supply may serve as an additional headwind for home prices.

In April, inventory was 12% lower than in the same month last year, the smallest year-over-year decline since 2019.5 The most recent weekly housing inventory reading shows that inventory was down only 3% from last year, suggesting we may see year-over-year inventory growth over the next few weeks.

Existing home sales fell 2.7% in March on the back of higher mortgage rates

The questions is, where do things go from here? While I obviously don’t have a clear answer, if I did I would have better things to do than writing this piece, there are a few hints as to where the housing market may end up in the next year or two.

Mortgage applications have already dropped 10% from their peak and will likely continue to fall in the short-term, according to Ian Shepherdson of Pantheon Macroeconomics.6 There are also signs that homebuyers who signed contracts on new construction when mortgage rates were closer to 3% are starting to think twice about closing on their purchase now that rates are close to double that.

Nicole Friedman wrote a fantastic piece highlighting this phenomena over the weekend.

Buyers who purchase newly built homes will generally sign a contract and pay a deposit several months before their homes are ready to be occupied. These transactions account for around 10% of all U.S. home purchases.7 While buyers can lock in a rate nine-to-12 months out from closing, this can be costly and unpredictable, and may leave buyers exposed to higher financing costs if rates decrease over the next year in light of a quickly changing economic landscape. This may lead higher financing costs to disproportionately effect the new construction market.

On the other hand, existing home sales may prove to be more resilient, due to buyers being able to lock in rates 30-to-60 days out from closing.

Something that was not as prevalent in previous housing downturns, but that does exist today, is the presence of institutional money managers in America’s single-family housing market.

Ryan Dezember did a great job of underscoring this changing dynamic in April. Here is the article if you would like to learn more. I also intend on doing a piece spotlighting this phenomena and the unintended, but harmful, effects it has had on millennials and Gen Z in the coming weeks.

For example, it was estimated that investors accounted for 24% of recent home purchases in Houston.8 Private equity and Wall Street style investors will typically make all-cash offers, well above the asking price, and can close on a purchase with much greater expediency than typical homebuyers.

While these firms will feel the consequences of rising costs of capital, their deeper pockets make them better equipped to jump-in and make-up for traditional homebuyers who are deciding to stay on the sidelines.

Whatever the next few years bring to bear, I do fully expect American single-family home values to continue trending higher over the coming decades. Rising interest rates and short-term economic instability do not make-up for the fact that there is an approximately 4 million unit shortage of housing in the United States.9 This issue will take many decades to remedy, if it is ever properly solved.

For those with excess savings, the next few years may serve as a great opportunity to buy or invest in single-family homes at a favorable basis.

(1) https://www.verifythis.com/article/news/verify/money-verify/mortgage-rate-highest-since-2009-fact-check/536-ff37e9d0-c2f0-42e1-9a6e-4ac4dc35adba2

(2) https://www.visualcapitalist.com/20-years-of-home-price-changes-in-every-u-s-city

(3) https://www.bloomberg.com/news/articles/2022-05-03/housing-market-prices-rise-worsen-inflation-dilemma?sref=BAeRoNCR4

(4) https://www.zillow.com/report/2017/homeowners/typical-american-homeowner/#:~:text=At%20%2462%2C500%2C%20the%20median%20household,the%20first%20home%20they%20purchased.5

(5) https://www.cnbc.com/2022/05/10/housing-market-improves-as-rising-mortgage-rates-weigh-on-sales.html6

(6) https://www.barrons.com/articles/housing-market-economy-fed-rate-hikes-516482263017

(7) https://www.wsj.com/articles/they-signed-contracts-for-their-dream-homes-last-year-now-their-borrowing-costs-are-ballooning-11652607001?mod=hp_trending_now_article_pos18

(8) https://www.wsj.com/articles/if-you-sell-a-house-these-days-the-buyer-might-be-a-pension-fund-116175448019

(9) https://www.freddiemac.com/research/insight/20210507-housing-supply