A housing market on hiatus, but for how long?

Written by: Peter Prudden

By now, we are well versed that mortgage rates recently touched their highest level since 2000 and affordability crisis has created the lowest level of demand for a mortgage since 1995. The monthly mortgage payment for purchasers of existing homes, using the 30-year average mortgage rate, stands at roughly $2,309. This is a substantial increase from $977 in March 2020 and a core objective in the Federal Reserve’s ongoing two-year battle to tame all things inflation. 

US Home Prices hit a new all-time high in August, while affordability plummeted to record lows. This is a glaring negative divergence. When the fundamentals of the market have changed, but prices keep trending in the same trajectory, it is an unsustainable path, and a catalyst behind the stop and start market we have experienced since the summer of 2022. We are witnessing the housing market on edge due to a growing sense of nervousness about what the rise in bond yields has to say about the economy, about the stock market, about the Fed, as well as the value of the dollar. When people lack clarity, they decide to lighten up and do nothing. Only 1% of US homes changed ownership this year, the lowest share in at least a decade. It is telling us that the housing market is in the early innings of a recession, but does that indicate doom and gloom? I say no, for now. A key migration market that I track is Sun Valley, ID. Year to date the number of properties that have sold are down 22%, new listings are down 11%, but the median sale price is up by a positive 5%. 

In May of 2022 I wrote about the forth coming summer stall which suggested the housing market was going to quickly hit the brakes due to the rise in mortgage rates and buyer fatigue from overbidding. As we worked our way to year end, rates hit a high in November and began to trickle down into Q1 of 2023 which led to a rapid recovery timed perfectly with seasonality of the spring market post Super Bowl. What was evident from our spring market is that a 5.5 to 6% mortgage rate will have the same drunk effect that the sub 3% rate provided coming out of the pandemic. Buy at all costs. So, the market has an underlying level of support which is why prices will not materially collapse. We can certainly pause and work off the covid pandemic price increase through a function of time rather than an outright decline which we are doing now. 

Talking of my book of business for a moment, I have multiple listings priced at or above $4.5M and a couple of buyers with 9-figure budgets. They are all sitting on the sidelines waiting for the recession and prices to outright decline. The recession talk has been a news headline generator dating back to when CPI printed 9%. What has changed for the high net worth cash buyer in the last 60 days (about 2 months) is confidence in the economy being able to withstand the blows and keep getting back up coinciding with the stock market starting to demonstrate volatility. Going back to my days as a trader on Wall Street, when the crowd is at its loudest and leaning heavy to one side, they are often on the wrong.  

Is “higher for longer” destined to self-destruct? Bond markets are being flooded with supply which is a primary driver behind higher rates. US Treasuries saw their 32nd straight week of inflows with the week ending October 14th, by far the longest streak since 2008. But we have witnessed in real time the notion of higher for longer going on two years, since the Fed began this current cycle of raising rates, and yet the consumer has been dealt blow after blow, but like Rocky on the ropes, it remains resilient.  

The most recent earnings season that is concluding this week with a few important retailers left to report is also suggesting the recession is over in corporate profits, which had declined for three consecutive quarters, starting in the fourth quarter of 2022. But with 75% of the S&P 500 index having reported, it looks like they will finally grow again this quarter. 

For now, stagflation has set into the housing market. Demand is softening, but prices are not coming down and we are likely not to see a material decline. This is important because there will need to be a larger shock to the system to make home prices head incrementally lower, felt through lower stock prices which to date have held in resoundingly well. 

The conundrum we face is fear and negativity are currently running rampant amongst consumers. Saving Treasuries now means potentially destroying stocks, and the stock market is the last remaining positive catalyst for home buyers to bank on from a sentiment standpoint and ability to pony up down payments in leu of mortgage rates that just tagged 8% nationwide. But will it be more than just a scare? Recession spotting was all the rage in 2022, as the S&P 500 sold off, the Federal Reserve raised interest rates, and the yield curve inverted. Instead, the economy kept growing—U.S. gross domestic product increased by 4.9% in the third quarter—and the market found its footing. Recession fears were put on the back burner, if not extinguished completely.  Still, it would be a mistake to dismiss the possibility of a slowdown, as the evidence suggests that the odds of one are rising. Leading indicators continue to point to a recession, while the drop in M2 money supply continues at a pace that suggests one, too. There has been an improvement uptick in U.S. bank lending, but it is still at levels that are indicative of an approaching recession. 

During Covid-19, the Department of Education instituted an automatic pause on federal student loan payments in 2020. During this pause, interest on these loans was suspended, providing much-needed financial relief for borrowers. This policy has been extended multiple times, affording borrowers over three years of relief from loan payments. This pause is set to end in October 2023, reintroducing a significant financial burden to millions of individuals.

When it comes to the housing market, the butterfly effect goes like this: As student loan payments resume, individuals may have less disposable income for discretionary spending, including travel and rentals. This could lead to a decrease in income for owners of second, third, and fourth homes who rely on rental income. As a result, these property owners may be compelled to sell, potentially solving the inventory problem plaguing the housing market and causing prices to decline. As it stands, it’s the second-largest consumer debt category (mortgages are the first). The total amount of student loan debt is nearing an astounding $1.8 trillion.

Over the past few years, the housing market has faced limited inventory and skyrocketing prices. The median home price in the U.S. has seen a significant increase, making homeownership increasingly unattainable for many. If the resumption of student loan payments leads to an increase in housing inventory and a decrease in home prices, it could potentially make homeownership more attainable.

Another sign of the consumer showing early signs of fatigue from the Taylor Swift Economy are credit card losses which have been rapidly rising since the first quarter of 2022. Since that time, it’s an increasing rate of losses only seen in recent history during the recession of 2008.