Home shopping has been particularly hard over the last couple of years. U.S. home prices rose by 42% during the pandemic housing boom, but it’s already beginning to slow down. In the U.S., housing inventory is slowly rising, property prices are falling, and sellers are lowering their asking prices. The housing market has slowed down at its fastest pace since 2006.

At least in the near term, we anticipate this trend to continue. In order to slow growth and combat inflation, the Federal Reserve is putting pressure indirectly on mortgage rates by hiking short term interest rates. Typically, when the Federal Reserve raises the fed funds rate, long-term rates also rise and as the interest rates on the 10-yr Treasury bond goes up, mortgage rates usually rise.  This is in part the reason why mortgage rates have skyrocketed and are now above 5% (see image below). Additionally, they have said that they will keep raising rates as long as inflation continues, thus mortgage rates may continue to remain high. While this can be bad news for homebuyers, this is necessary to stabilize the market. As rates go up, inflation should begin to moderate. What then lies ahead for the housing market and the economy?

The housing market is a key predictor of the economy slowing down. Although the housing market is weakening, homeowners still have plenty of equity, and compared to previous cycles, mortgage underwriting has been much more prudent. Because of this, another worldwide housing catastrophe is unlikely. Moving forward, we expect that sales of both new and existing homes will most likely continue to fall as indicated by the decline in the National Association of Home Builders index (see image below).

Given how expensive housing is relative to the historical average, price declines may also persist. This is by no means something of concern. The Federal Reserve continues to utilize tight financial conditions to dampen economic activity in its bid to lower inflation, which is what we are seeing in the housing market as a result.  We don’t expect home prices to decline to pre-pandemic levels, but we do anticipate mortgage rates to remain high for the foreseeable future. Fear not, existing homeowners are likely to see their built-up equity remain resilient to these price fluctuations. Needless to say, it looks like we are taking a small step in the right direction.

Andrew Ochoa
Portfolio Administrator