Maria Irene
In recent times, the housing market has found itself at the intersection of converging financial forces. On one hand, we have the yield on the 30-year U.S. Treasury hitting 5.119%, the highest since 2007, while on the other, the 10-year Japanese Government Bond (JGB) yield has also shown an upward trend. The Bank of Japan (BOJ) has had to intervene to maintain the yield at 0.25%, making unlimited purchases of 10-year JGBs.
Simultaneously, mortgage rates in the U.S. have reached staggering heights, averaging around 8%, a level not seen in decades. This drastic rise was unexpected, given earlier forecasts suggesting that rates would stabilise at around 6% by the end of 2023. Yet, here we are, with the average rate on a 30-year fixed mortgage climbing even higher than the 7.07% reported in August.
But it’s not just the interest rates and bond yields that are causing concern. The National Association of Realtors’ affordability index has plummeted to its lowest point since 1989, at 91.7. Meanwhile, the NAHB/Wells Fargo Housing Opportunity Index indicated that a mere 38.1% of homes sold in the last quarter of 2023 were affordable for families earning a median income of $90,000.
So, what does this all mean? It’s a financial squeeze from all sides—rising treasury and JGB yields, soaring mortgage rates, and plummeting housing affordability—that is creating a perfect storm in the housing market. To put it in perspective, the 2023 State of the Nation’s Housing report paints a bleak picture of unaffordability, housing shortages, and barriers to first-time homeownership. The monthly payments needed to purchase a median-priced home in the U.S. have surged to $3,000, pricing out 2.4 million more renters from entering the property market compared to last year.
The situation is dire, but it’s not without hope. Some states and localities are initiating reforms to bring down housing costs. However, these measures are like sticking plasters on a gaping wound; they’re not enough to heal the systemic issues at play. More public investment is required to foster housing and homeownership affordability, particularly for low-income households.
But let’s not forget the broader economic implications. Rising yields mean increased borrowing costs for the government, which could lead to reduced public spending in other essential areas, such as healthcare and education. On the global stage, the Bank of Japan’s interventions to curb rising JGB yields reflect the interconnectedness of financial markets. A surge in U.S. yields has ripple effects across the world, affecting not just housing but potentially slowing down global economic recovery post-pandemic.
The elephant in the room is the Federal Reserve and other central banks. Their policies around interest rates have a domino effect on treasury yields and, in turn, mortgage rates. While they are grappling with their own set of challenges like inflation and employment, the housing crisis can’t be an afterthought; it should be front and centre in policy considerations.
The confluence of high treasury and JGB yields, soaring mortgage rates, and dwindling housing affordability presents a multifaceted challenge that requires a multifaceted solution. Monetary policy adjustments, public investment in affordable housing, and systemic reforms are all pieces of this complex puzzle. Without decisive action, the dream of homeownership will remain just that—a dream—for millions of people, not just in the U.S. but around the world. And let’s not forget, when the housing market sneezes, the whole economy catches a cold. So, it’s high time we found a cure for this ailment before it turns into an epidemic.
