Why have mortgage rates recently surged?
In response to high inflation, the federal reserve (the United State’s central bank) is raising rates. What does this mean? Basically, when the Fed raises rates, the cost of debt increases. This applies to the housing market. Mortage rates on a 30 year mortgage last year were around 3%. Now, they are now almost 6%.
Has home buying slowed down?
In short, yes. Home buying has slowed. This is reflected in the prices and how quickly houses that are listed are sold. In the last couple of years, houses that were listed in desirable markets were selling within days of listing for over asking price. Many homes were selling sight unseen. This is no longer the case. Houses are sitting longer and prices are coming down. Why is this? The cost of buying a house has increased due to the increase in interest rates. This is reflected in the average monthly payments for single family homes in the USA. The average mortgage payment has increased from $1500 in 2019 to $2500 now. (See chart below) An increase in price slows demand.
Has new home construction slowed down?
The answer is, once again, yes. The chart below shows housing starts. That is, new construction, for both single family and multi family. You can see the sudden dip in 2022. Once again, an increase in cost of building and a decrease in demand for buying has slowed new home and multi family construction.
Is there a potential housing bubble, and what factors would cause it to “burst?” How does now compare to the 2008 crisis?
Once again, the answer is yes. There is a potential housing bubble. The chart below shows that prices of homes are at an all time high. However, this does differ in one key way from the 2008 crisis. The 2008 crisis was a housing bubble. This time, we have an everything bubble. The 2008 crisis was caused by banks giving mortgages to anyone and everyone, even if they couldn’t afford it. This time, the “housing bubble” is the result of high inflation and monetary policy which has caused an increase in prices across the board and inflation we haven’t seen in 40 years. So, what would cause housing (and everything else) to burst? If the Fed continues to raise rates in an attempt to bring down inflation, they could cause the everything bubble to burst. This would have massive ramifications across the board, not just in housing.
Housing Market Summary
Mortgage rates are up, the cost of owning and buying a home is up. Home sales have slowed and new construction has slowed. We are in high inflation and a potential “everything bubble.” The Federal Reserve is in a difficult spot trying to balance bringing down inflation while not crashing everything. We will have to wait and see what happens next.