Is the Housing Bubble about to Explode?

Share:

The Fed’s hawkish position is being felt across the board of credit markets. While different sectors have been pricing in the Fed’s rate hikes, many people have been caught by surprise by the speed at which markets are repricing the cost of credit. Mortgage rates tell an interesting story, especially against the backdrop of a heated housing market in the US.

The current average 30-Year Fixed Rate Mortgage is at 5.10%, its highest level since 2010 (FRED data: https://fred.stlouisfed.org/series/MORTGAGE30US).

When compared with long-term historical data, it is tempting to think that these levels aren’t especially high. Maybe one could even think that we will see a cooling off of the mortgage rates, considering how fast they have shot up year-to-date. However, adding the evolution of house prices into the equation paints a pretty bleak picture for those currently looking to acquire housing property with credit.

Since the lowest point after the Great Financial Crisis, around 2009, the average sales price of houses sold has essentially doubled, even accounting for regional differences (FRED data: https://fred.stlouisfed.org/graph/?id=ASPS,ASPW,ASPUS,ASPNE,ASPMW ).

This surge in prices has been a result of the low interest rate environment, but more importantly, the severe shortage of homebuilding since the housing bubble collapse in 2008. More recently, the pandemic related shutdowns and supply chain issues have added even more constraints to the supply of new homes. (https://www.freddiemac.com/research/insight/20210507-housing-supply)

Will this recent spike in mortgage rates be the catalyst that lowers home prices by cooling down demand? Consider the following chart:

https://pbs.twimg.com/media/FR0_2A9WUAA3sX0?format=png&name=small

Applications for mortgages by would-be home buyers haven’t been very sensitive to rate hikes in the recent past, but this last move has been so big and abrupt that this time could be different. Or maybe the mismatch between supply and demand for housing is so significant that prices keep getting pressured upwards, if only at a slower pace. It’s too soon to be sure. Time will tell.