If you’ve been keeping an eye on the housing market in America, you’ve probably heard the ubiquitous cry: “Mortgage rates are too high!” Well, according to financial analyst Nick Gerli, the situation isn’t as dire as you might think. In a series of tweets, Gerli dissects the mortgage rate issue, painting a vivid picture of a housing market where the real villain isn’t necessarily the rate of your loan but rather the stratospheric home prices.
Starting with the basics, Gerli highlights that the current mortgage rates of 8% aren’t as outrageous as they seem. After accounting for inflation, the real mortgage rate stands at around 4%, which Gerli points out is in line with the long-term average. The real rate is calculated by subtracting the inflation rate from the 30-year mortgage rate, so for example, a 7.5% mortgage rate with 3.5% inflation equals a 4% real rate.
It’s a decent approach to comparing mortgage costs over different economic eras. What this means is, despite the uproar, these rates are not the anomaly we might think them to be. However, what is surprising, according to Gerli, is the plummeting demand for mortgages, which has reached its lowest point in 28 years.
So, if mortgage rates aren’t the obstacle, what is? The answer lies in the unaffordable home prices. Relative to inflation, rents, and incomes, home prices have skyrocketed. While the mortgage rates are keeping in line with historical norms, the prices of homes are pushing would-be homeowners out of the market.
Gerli asserts that the path of least resistance to invigorate the housing market isn’t necessarily a drop in mortgage rates. In fact, people are beginning to accept that high rates are here to stay for the foreseeable future. This leaves a decline in home prices as the likeliest way to reanimate demand.
Interestingly, Gerli adds a broader perspective by looking back over 20 years. He argues that homebuyers and investors had been conditioned by the Federal Reserve to anticipate continually lower real interest rates. This expectation has led to inflated home prices over the past four decades. However, this cycle is nearing its end.
But what could be the saving grace for the currently inflated home prices? Gerli speculates that the only scenario where they won’t crash is if inflation re-accelerates out of control. An 8-9% annual inflation rate could lead to a wage-price spiral and reduce real mortgage rates, potentially making homes more “affordable.” But he considers this unlikely, especially since the rental market, which constitutes about 35% of the inflation calculation, is showing a decline in America.
Gerli’s tweets provide a nuanced viewpoint. They remind us that while it’s easy to blame mortgage rates for the struggles of the housing market, the real issue could be much deeper. As the nation grapples with sky-high home prices, it’s crucial to address this root cause rather than fixate on mortgage rates. To put it succinctly, it’s not so much about the cost of borrowing to buy a house, but the exorbitant cost of the house itself. Home prices, not mortgage rates, may be the real boogeyman haunting the American dream.
