Housing Market Faces a World of Pain

Several ominous signs face the housing market.

First, the average 30-year fixed-rate mortgage soared to a three-year high of 4.67% in the week ended March 31, according to housing agency Freddie Mac. That’s up from 4.42% a week ago and 3.18% a year ago, To be sure, the rate is down from 6.4% in October 2007.

The recent increase stems from raging inflation, surging bond yields, and anticipation of strong Federal Reserve interest-rate increases. Consumer prices skyrocketed 7.9% in the 12 months through February, a 40-year high.

The 10-year Treasury yield has climbed 91 basis points so far this year to 2.42%. The Fed began raising rates in March, with a 25-basis point move, and some economists and investors anticipate 50-basis point hikes in May and June.


As for mortgage rates, they “continued moving upward in the face of rising inflation as well as the prospect of strong demand for goods and ongoing supply disruptions,” Freddie Mac said.

Unmet Demand

“Purchase demand has weakened modestly but has continued to outpace expectations. This is largely due to unmet demand from first-time homebuyers as well as a select few who had been waiting for rates to hit a cyclical low.” A housing shortage is plaguing buyers too.

So it’s no wonder that pending home sales fell 4.1% in February from January, the fourth straight decline, according to the National Association of Realtors. Pending transactions dropped 5.4% year-on-year.

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“Pending transactions diminished in February mainly due to the low number of homes for sale,” Lawrence Yun, NAR’s chief economist, said in a statement. “Buyer demand is still intense, but it’s as simple as one cannot buy what is not for sale.”

In February, higher mortgage rates and sustained home-price appreciation led to a year-over-year increase of 28% in mortgage payments.

“The surge in home prices combined with rising mortgage rates can easily translate to another $200 to $300 in mortgage payments per month, which is a major strain for many families already on tight budgets,” Yun said.

He forecasts mortgage rates will total about 4.5% to 5% for the remainder of the year and expects about a 7% reduction in home sales in 2022 compared to 2021. And he expects home-price increases to moderate to 5% by year-end. Home prices skyrocketed 18.8% last year.

A ‘Brewing Housing Bubble’

Meanwhile, a report from researchers on the Dallas Fed’s web site says they see evidence of a “brewing U.S. housing bubble.” They too note surging prices. “There is growing concern that U.S. house prices are again becoming unhinged from fundamentals,” they wrote.

Bloomberg columnist Conor Sen also sees a dire state of affairs in the housing market. “If you want to know what stagflation looks like, check out the housing market,” he wrote.

“The conditions that existed during the 1970s — high inflation and stagnant output — are happening already in this segment of the U.S. economy.”

Homebuilders are hard at work trying to build new houses to meet demand, but “the number of homes actually being completed has been stagnant because of persistent supply chain problems,” Sen said.

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