The US real estate market anticipates an even greater economic shock: mortgage rates close to 7%

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Unbeknownst to the shoppers lining the sidewalks outside the frantic open house this spring, the pandemic housing boom was already in its final run. In March, Fortune published a pair of articles titled “The housing market is entering uncharted waters” and “An economic shock has just hit the housing marketarguing just that: the hot housing market would change quickly in the face of soaring mortgage rates, which had risen from 3.2% in January to over 4% at the end of March.

Not only did rising mortgage rates help wipe out the pandemic housing boom, it was replaced by what Federal Reserve Chairman Jerome Powell is now calling a “tough correction.”

“Longer term, what we need is for supply and demand to be better aligned so that house prices rise at a reasonable level and pace and people can afford housing again. houses. We in the housing market probably have to take a correction to get back to that place,” Powell told reporters last week. “This difficult [housing] correction should put the housing market back into a better balance.

The bad news for mortgage brokers and builders? This real estate correction is far from over.

In fact, the shock to the US housing market continues to escalate: On Monday, the average 30-year fixed mortgage rate jumped to 6.87%. This is both the highest mortgage rate since 2002 and the biggest 12-month jump (see chart below) since 1981.

Every time the Federal Reserve goes into inflation-fighting mode, things get tough for rate-sensitive sectors like real estate. Higher mortgage rates cause some borrowers, who must meet strict lender debt ratios, to lose their mortgage eligibility. It also excludes some buyers from the market. A borrower in January who took out a $500,000 mortgage at a rate of 3.2% would owe a monthly principal and interest payment of $2,162 over the term of the 30-year loan. At a rate of 6.8%, this monthly payment would be $3,260.

The economic shock caused by high mortgage rates, of course, underpins the current housing correction. The housing correction is the US housing market – which was based on 3% mortgage rates – trending towards equilibrium. As buyers pull back, the housing correction will lead to higher inventory levels and lower home sales volumes. It also exposes much of the country to the risk of falling property prices.

We are already starting to see lower house prices in buoyant real estate markets like Austin, Boise and Las Vegas. However, the drop in house prices has not yet affected the whole country. According to Zillow, only 117 housing markets saw lower home prices between May and August. In more than 500 other housing markets, prices were either flat or rising.

But more markets could soon enter the camp of falling house prices. As long as mortgage rates stay near 7%, housing analysts say Fortune we will see downward pressure on house prices in the near term.

“The longer it lasts [mortgage] rates remain high, we think housing is going to continue to feel it and have this reset mode. And the affordability reset mechanism that needs to happen right now is activated [home] price,” says Rick Palacios Jr., head of research at John Burns Real Estate Consulting. Fortune.

The big question: To what extent can “affordability under pressure” – a 3 percentage point increase in mortgage rates coupled with bubbly home prices – drive house prices down? Unlike the housing crash of 2008, this time we don’t have a housing glut or a subprime crisis.

Want to stay up to date on housing correction? Follow me on Twitter at @NewsLambert.

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