Nightmare on Rate Street

It’s been hard to escape the headlines about mortgage rates hitting 8%, and even harder to escape conversations about the housing market, regardless of whether or not you’re actively looking to buy or sell.

Like with most datasets, there are positive and negative ways to interpret the current housing indicators. This post will focus on some recent moves that signal caution, but there remain occasional bright spots, including the fact that the housing market has not (yet) crashed, despite many warnings that it would.

The chart below illustrates the relationship between 10-year U.S. Treasury yields and 30-year fixed mortgage rates. Given the sharp rise in yields over the last few months, it’s no surprise that mortgage rates followed a similar trend. What’s interesting is how large the spread has become between the two.

Most people don’t try to offset their mortgage rates with 10-yr Treasury yields, but the premium a consumer has to pay above the so-called “risk-free” rate is considerably higher than usual right now. No matter which way you slice and dice it, this is constricting capital, and cooling activity in the residential housing sector.

Although mortgage rates are lower than the astronomical levels of the 1980s (when they hit a high of 18.6% in October 1981), an 8% mortgage is the highest level consumers have seen in over 23 years.

Rocky Housing Picture Show

Mortgage rates are the obvious indicator, but it’s important to know what some of the tangible activity metrics are telling us in response to more expensive financing.

As mortgage rates rose, the data clearly showed a slowdown in current sales, future expected sales, and even traffic of prospective buyers. There was a brief revival of activity in June and July of this year — which, in my opinion, was the result of strong seasonal factors, falling inflation readings, and the stock market rising through the end of July, giving consumers good “feels” about spending.

Since then, the trend has returned to a downward slope, with the traffic of prospective buyers having remained negative since mid-2022. Activity and appetite for home buying have clearly taken a hit as a result of the higher cost of borrowing.

Night of the Living Supply

If you happen to be one of the consumers looking to buy or sell a home, you may be wondering how all of this can be true, while home prices are still historically high.

The operative word that I think will go down as defining this economic cycle is “lags”. Home prices take a while to respond to activity data, especially during a time when existing homes aren’t changing hands as frequently because no one wants to give up their sub-4% mortgage rate. It’s hard to mark-to-market if the market doesn’t have enough activity.

One of the indicators that leads home prices is new home supply, and home prices lag this data by about one year. In other words, as new home supply increases, home prices should fall — but not until roughly one year later. Likewise, as supply falls, home prices should increase.

One confusing element here is that the supply line has been a little jumpy. Supply decisively increased between late 2020 and mid-2022, but has fallen since — likely keeping prices supported. If rates stay elevated, supply may pile up, putting pressure on prices as time rolls on.

The other confusing element is that this chart shows home price growth near 0%, leading us to believe that prices have come down. But they haven’t, they’ve just stopped rising as quickly. Since December 2019, national home prices have increased more than 43% (latest data available is July 2023).

Despite an occasional bright spot in housing data, there are mounting concerns and indicators otherwise. Housing is one of the most important cyclical indicators for our economy, and is strongly correlated to the health of the consumer and their appetite to spend. It’s been a confounding element for many economists and analysts as it displayed seemingly unyielding strength in the face of tightening, but a tone shift may be afoot.

This article originally appeared on SoFi.com and was syndicated by MediaFeed.org.

Communication of SoFi Wealth LLC an SEC Registered Investment Adviser. Information about SoFi Wealth’s advisory operations, services, and fees is set forth in SoFi Wealth’s current Form ADV Part 2 (Brochure), a copy of which is available upon request and at adviserinfo.sec. Liz Young is a Registered Representative of SoFi Securities and Investment Advisor Representative of SoFi Wealth. Her ADV 2B is available at sofi.