Our hearts go out to all those affected by the recent violence over the Fourth of July weekend.
Roughly three months ago, I wrote about the housing market and the confluence of elevated mortgage rates and tight housing supply. In that report, I discussed my expectations of demand destruction and the potential for homebuilders to begin repricing their new home inventory. Since then, conditions have begun to soften. Rising mortgage rates have put a dent in housing affordability and disincentivized many people from buying homes or refinancing existing mortgages.
This is a very different story from the pandemic housing boom that saw single-family home prices explode and a surge in mortgage refis; tight housing supply and robust demand led to buyers bidding up prices. The precipitous fall in mortgage rates during 2020, along with the shift to life at home during the pandemic, drove would-be buyers into the housing market and encouraged people to refinance their existing mortgages. Borrowing costs fell and owning a home became more affordable for many people.
When I wrote my last chart of the week in March, the 30-year fixed mortgage rate stood just below 5%. As this week’s chart shows, the rate has since reached 5.83%, nearly doubling since the end of 2021. U.S. national mortgage rates track in-line with interest rates, and as the Federal Reserve (Fed) has engaged in its tightening campaign, the 30-year fixed mortgage rate has risen in tandem.
Borrowing costs have increased, inflation has climbed to record levels and fear of a recession looms. Consumer confidence has taken a hit and now potential home buyers are starting to back down. Existing-home sellers and some homebuilders are cutting prices in an effort to attract buyers, as demand continues to cool. In May, existing home sales in the U.S. fell to 5.41 million homes, a 3.4% decline from April. Additionally, existing home sales in the U.S. have fallen each consecutive month in 2022 and sales are down 16.8% year-to-date through May.
There have been mentions of another housing market collapse, but there is a stark difference between the drivers of the housing bubble leading up to the 2008/2009 global financial crisis and the red-hot housing market we’ve experienced of late: risky lending. The subprime loans that fueled the pre-crisis housing boom have not fueled the current boom, and there are stricter lending regulations today compared to the early-to-mid-2000s.
However, not unlike the period leading up to the collapse in 2008/2009, delinquency rates should tick higher. As seen following the Fed’s last hiking cycle in 2017 and 2018, multifamily delinquency rates later rose. For clarity, there is a time lag for delinquency rates. The Fed began raising rates in March 2017 and made two additional hikes in June and December of that year. Then in 2018, it hiked in March, June, September and December. As reported by Freddie Mac, multifamily delinquency rates did not begin increasing until early 2019. For further context, a decade earlier, multifamily delinquency rates did not begin to increase until 2009 even though we know delinquencies were commonplace within the subprime mortgage market pre-crisis. Homebuyer psychology does not change immediately, but it eventually changes due to necessity, especially for sellers that need to sell.
Current market conditions and the prospect of a recession are stifling whatever demand is left in the housing market. These are unprecedented times. The Fed has raised rates in an effort to tamp down inflation, and recently implemented its largest rate hike since 1994 (75 basis points). The U.S. housing market is due for a reset, given the extraordinary home price growth seen since the onset of the pandemic.
It remains to be seen how far the economic ripples from the housing downturn reach. Major U.S. homebuilder Lennar has warned of the current complications in the housing market and luxury furnisher RH cut its full-year sales forecast for the second time in a month. Moreover, real estate brokerage firms Redfin and Compass recently announced plans to cut jobs, while JPMorgan also announced layoffs and reassignments that would affect the bank’s mortgage-origination division.
For housing in particular, one concern going forward is how households will respond to falling home values together with elevated debt-servicing costs. Mortgage delinquencies will most likely increase as a result of rising rates and consumers will pull back on spending. The prospect of a recession will obviously hurt consumer confidence, and I continue to believe home prices (new-builds and existing) will reprice lower. However, I do not think a collapse in the housing market is imminent. U.S. home inventories are still underbuilt, given the extensive population of millennials who are growing older. To reiterate, we are living through unprecedented times. In many industries, conflicting crosscurrents between supply and demand are making past cycles irrelevant and forecasting the future nearly impossible. Nonetheless, we continue to do our best to understand each market in search of opportunity.
The material provided here is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management.
This material is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management. This material is not intended to be relied upon as a forecast, research or investment advice, and it is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy.
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