From Picket Fences to Pocketbook Panic: The US Housing Market and the 7% Headache

In the dance of numbers that underpins the US economy, a new rhythm is causing unease among potential homebuyers: mortgage rates are waltzing their way back to 7%. It’s a tango of economics that, according to seasoned real estate analyst Nick Gerli, could send the housing market into a frenzy. The cost of homeownership, considering the mortgage, tax, insurance, and maintenance, is hovering around $2,700 per month – significantly outpacing the $1,850 average rent. It’s the largest discrepancy we’ve seen, and Gerli suggests it might be the tipping point that could bring the entire house of cards tumbling down.

As Gerli notes, the first domino likely to fall would be mortgage rates, as they could once again find themselves in a downward spiral. Alternatively, the ‘For Sale’ signs might suddenly boast much more palatable price tags. To prevent another catastrophic downturn in buyer demand, a convergence of the two seems inevitable.

Mortgage applications for buying a house in mid-May already hit a 20-year low. As mortgage rates continue their march upwards, Gerli anticipates this figure to decline even further. This prompts an unsettling question: how far can homebuyer demand in the US Housing Market shrink before something in the economy snaps?

The American housing market, Gerli predicts, won’t stand a chance in the face of sustained 7% mortgage rates. The current transaction volume is already anaemic. If it plummets further, the fallout will inevitably spread to associated industries like construction, manufacturing, and retail, leading to a wave of layoffs.

The ramifications are expected to stretch to the banking system as well. Gerli recalls the turbulence of early March when mortgage rates last flirted with the 7% mark and the ensuing crisis at Silicon Valley Bank. Banks are still reeling from significant unrealized losses, making these rate spikes a potent destabilizing force.

American consumers aren’t safe from the tremors either. Higher rates signify a more expensive mortgage and also inflate credit card and car loan costs. This arrives at a time when wage growth is stagnating and even retreating for higher income groups. Furthermore, rates are escalating just as bank lending shows a declining trend. A closer look at Commercial & Industrial loan growth reveals a drop from 15% to 7% growth YoY, with further decrease expected – historically, a significant recession indicator.

In essence, it’s hard to imagine how these rising rates won’t rattle the economy and the housing market, ultimately leading to lower rates. But until then, it’s a nail-biting watch. The return of the 7% rates, a harbinger of another potential collapse in homebuyer demand in the US Housing Market, should prompt sellers to brace themselves for potential price cuts in the upcoming summer.

The divide between the cost of buying and renting, at a historic high, paints a disheartening picture of affordability in the US Housing Market. It sets up a clear choice for potential homebuyers, who now, more than ever, find renting a much more affordable alternative. As the summer season approaches, a period typically marking a peak in buyer demand, we might instead see a further decline if affordability continues to be a deterrent.

The increasing mortgage rates pose the greatest threat to already expensive markets. Take Los Angeles-Orange County, for example, where the average buyer is faced with a $5,400/month bill on mortgage interest, taxes, and insurance in 2023, in contrast to a $2,900/month rental cost. As such, sellers in these markets might need to consider significant price reductions to attract buyers back.

On the other side of the coin, a handful of cities, such as Memphis, TN, buck the trend. Here, the cost of buying ($1,469) is slightly below the cost of renting ($1,491). This shows that some local populations still have a strong incentive to purchase homes in 2023, despite the steep prices and intimidating mortgage rates. Thus, despite the overall gloomy outlook, these markets may indeed weather the storm, holding their value as the housing downturn intensifies.

Nevertheless, these are few and far between. The lion’s share of US cities, particularly in California, Seattle, Salt Lake City, Austin, and Portland, continue to exhibit unaffordable housing landscapes.

Then comes the million-dollar question: Will mortgage rates remain at 7%? Given the current economic climate, one would expect them to decline. After all, America is in the throes of a credit crunch, a banking crisis, and the early stages of a recession. All signs point towards lower interest and mortgage rates in the future.

However, the unpredictable swing dance of numbers seems to have other plans. For reasons still not entirely clear, rates are on the rise, not fall. Could it be due to America’s debt-ceiling standoff? Are bond buyers seeking higher yields to compensate for the risk of a US default? But then, why are the UK and Canada experiencing similar rate surges? It appears something global is at play.

One plausible explanation is that global bond buyers anticipate worsening inflation in the coming months. They demand higher yields on government bonds to compensate for this expected inflation hike. However, despite inflation’s consistent outperformance over the last two years, the current data on bank lending, commodity prices, and wage growth suggests a slowdown, not acceleration.

The contradictory signs are perplexing, to say the least. However, Gerli maintains his stance: he doesn’t believe mortgage rates will sustain at 7% for long. The economy and the financial system, as they stand, don’t seem equipped to handle it. And if the current state of the housing market is any indication, there isn’t much room left before it drags the entire economy down with it.

For now, all eyes are on inflation and its next move. Will it pull another rabbit out of the hat and keep rates higher for longer? Or will it bow to the economic pressure and lower rates as Gerli predicts? Only time will tell, but until then, the dance of numbers continues, and the real estate market holds its breath, waiting for the music to change.



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Maria Irene
Maria Irene
Maria Irene is a multi-faceted journalist with a focus on various domains including Cryptocurrency, NFTs, Real Estate, Energy, and Macroeconomics. With over a year of experience, she has produced an array of video content, news stories, and in-depth analyses. Her journalistic endeavours also involve a detailed exploration of the Australia-India partnership, pinpointing avenues for mutual collaboration. In addition to her work in journalism, Maria crafts easily digestible financial content for a specialised platform, demystifying complex economic theories for the layperson. She holds a strong belief that journalism should go beyond mere reporting; it should instigate meaningful discussions and effect change by spotlighting vital global issues. Committed to enriching public discourse, Maria aims to keep her audience not just well-informed, but also actively engaged across various platforms, encouraging them to partake in crucial global conversations.


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