The U.S. housing market stares down an even bigger economic shock—mortgage rates near 7%

Unbeknownst to buyers on the sidewalks outside this spring’s frenetic openings, the pandemic housing boom was already in its final innings. In March, the fortune published a couple of articles titled “The housing market is entering uncharted waters” and “An economic shock has just hit the housing market” arguing just this: The hot housing market would change quickly in the face of rising mortgage rates, which had risen from 3.2% in January to more than 4% by the end of March.

Not only did higher mortgage rates help cause the pandemic housing boom to fade, but it was replaced by what Federal Reserve Chairman Jerome Powell is now calling a “difficult correction.”

“In the longer term, what we need is for supply and demand to better align so that house prices rise to a reasonable level and at a reasonable pace and people can afford housing again. Probably in the housing market we have to go through a correction to get back to that place,” Powell told reporters last week. “This is tough [housing] The correction should bring the housing market back into balance.”

The bad news for mortgage brokers and builders? This housing correction is far from over.

Indeed, the shock affecting the US housing market continues to grow: On Monday, the 30-year fixed mortgage rate rose to 6.87%. This marks both the highest mortgage rate since 2002 and the biggest 12-month jump (see chart below) since 1981.

Whenever the Federal Reserve goes into inflation-fighting mode, things get tough for rate-sensitive industries like real estate. Higher mortgage rates mean that some borrowers, who must meet lenders’ strict debt-to-debt ratios, lose their mortgage eligibility. It also prices some buyers out of the market. A borrower in January who took out a $500,000 mortgage at a rate of 3.2% would be on the hook for a monthly principal and interest payment of $2,162 over the course of the 30-year loan. At a rate of 6.8%, that monthly payment would be $3,260.

The economic shock caused by high mortgage rates, of course, underpins the ongoing housing correction. The housing correction is the US housing market, which had been based on mortgage rates of 3%, working towards equilibrium. As buyers withdraw, the housing correction will cause inventory levels to rise and home sales volumes to fall. It is also putting much of the nation at risk of falling home prices.

We’re already starting to see home prices drop in bubble housing markets like Austin, Boise and Las Vegas. However, the fall in house prices has not yet affected the whole country. According to Zillow, only 117 housing markets experienced home price declines between May and August. In more than 500 housing markets, prices were flat or prices rose.

But more markets could soon move into the realm of falling home prices. As long as mortgage rates stay close to 7%, housing analysts say the fortune we will see downward pressure on house prices in the short term.

“The longer it is [mortgage] rates remain high, our view is that housing will continue to be high and will have this reset mode. And the accessibility reset mechanism that needs to happen right now is on [home] prices,” explains Rick Palacios Jr., head of research at John Burns Real Estate Consulting the fortune.

The big question: How much can “pressurized affordability” (a 3 percentage point jump in mortgage rates coupled with frothy home prices) push home prices down? Unlike the housing crash of 2008, this time we don’t have a housing glut or a subprime crisis.

Do you want to be up to date on the correction of housing? Follow me on Twitter at @Lambert News.

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