Mortgage Rates Are Closing In On 7%, Signaling Risk Of House Price Declines

For much of last year you could get a 30-year mortgage at around a 3% rate. Now mortgage costs are closing in on 7%. That’s a dramatic change in the affordability of U.S. housing in a short space of time. Recent data on house prices is showing some of the biggest drops in over a decade. However, it is early days, with prices still generally up year over year.

Housing Affordability

Mortgage rates matter for many buyers since these figures determine what many of them can afford. The median home sales price in August was $436,800, according to U.S. Census data.

That means that the monthly mortgage cost of a house has risen from approximately $1,000 to $2,500 for new home buyers. Of course, not everyone buys homes with a mortgage, but many do, and so the affordability of a home has been reduced for many Americans in the space of just a year.

The Atlanta Fed tracks housing affordability here, and though the data is not updated for the most recent move up in rates, the trend is weak for 2022, returning to low levels of affordability not seen since 2007.

Although house prices have not fallen significantly at this point, there are many worrying early signs for the housing market, beyond affordability. Here are some of them.

Rising Inventory

Housing inventory in the U.S. appears to be rising fairly sharply. This is a problem because it implies, in part, that houses aren’t selling at current prices.

House prices can be sticky because sellers are often reluctant to cut prices, but rising inventory suggests that reduced house prices may be needed to match buyers and sellers. Rising inventory could signal that material price declines are on the way.

Falling Prices

Then house prices may be starting to fall. Zillow data showed house prices dropped 0.3% from July to August . That’s the biggest monthly house price fall in over a decade on Zillow’s numbers. Case-Shiller indices are also seeing early price declines. Redfin RDFN is tracking similar trends, as well as noting more homes seeing price drops and less selling above the asking price.

Nonetheless, it’s early days, if house prices are set to weaken. Currently house prices remain up around 14% on a year-over-year basis. Further drops would be needed to see housing lose value on this basis.

The Fed

The root cause here is primarily the Fed pushing up interest rates as it fights inflation. That in turn drives up mortgage costs.

The good news is that interest rates are forward-looking, so the Fed’s likely plan to raise rates again in November and December is reflected in mortgage rates today, unless the Fed changes the script. Still, the market is less sure which way the Fed will move in 2023, and if more rate hikes are in the cards, that could push up interest rates, and hence mortgage costs, further.

The omens for housing do not look good currently. However, it’s also important to remember that the swings in the value of houses are often a lot more moderate than with other assets, such as stocks.

For example, peak to trough during the financial crisis from Q1 2007 to Q1 2009, the median U.S. house price fell 19%. Furthermore, that’s an extreme move in the history of U.S. house prices. So there are signs that prices may soften, but the market for housing can be more stable than for many other financial markets.