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Bloomberg: Things Are Getting Weird in the Housing Market

By October 14, 2022January 19th, 2023No Comments

By Tracy Alloway & Joe Weisenthal | Bloomberg

Higher mortgage rates generally don’t bode well for the housing market, and the US has just seen one of the steepest increases in history.

Would-be homebuyers are facing massive sticker shock right now, with measures of affordability worsening at their fastest pace on record. In fact we’re seeing a number of milestones reached in the market, with spreads on mortgages and benchmark interest rates reaching levels unseen in decades, while the volume of new sales is slowing at a faster pace than even during the aftermath of the global financial crisis.

So does this mean that home prices are about to collapse? That’s one possibility. But another possibility is that the housing market just gets weird.

James Egan, Morgan Stanley’s US housing strategist, recently cut his house price forecast to show a year-over-year decline in December 2023. But he’s expecting a fall of just 3% — a far cry from an outright collapse.

The problem is we’re in uncharted territory. Yes, mortgage rates have shot up, crimping affordability. But at the same time, unlike in the era prior to 2008 and the bursting of the subprime mortgage bubble, there are very few forced sellers and therefore very little inventory.

“A lot of these statistics that we use to forecast things like housing activity, and by that we mean home sales or housing starts as well as home prices, are at levels that we either haven’t seen before, or if we’ve seen them, we haven’t seen them for decades,” Egan says in an interview on the Odd Lots podcast.

“The listings of existing homes available for sale — we have that data going back for single unit homes to the early 1980s — It was never lower than it was earlier this year. We’ve been increasing just a very little bit off the bottom for the past three months,” he explains. “But we think that they’re going to keep listings tight, which will keep home prices more supported.”

To understand where house prices are heading, the team looks at four key things: Supply, demand, affordability and credit availability. While the first two components don’t tend to change quickly, affordability and credit availability can move very rapidly. And that’s exactly what we’re seeing now.

The upshot is that because the overwhelming number of homeowners are on fixed-rate mortgages, and because home equity is still high, most people are insulated from the coming shock. But this insulation comes with a cost, what Egan calls the “lock-in effect.”

“Current homeowners, in order to sell their home in a lot of instances would have to take out a mortgage that might be 200, 250, 300 basis points higher than their current mortgage,” says Egan. “They’re just not going to be willing to sell their home at the lower price point that might be more affordable for the first time home buyer.”

And so there’s a chance we may be heading into uncharted territory, where measures of housing activity deteriorate rapidly, even as prices stay firm.

Here’s a look at (one of) seven charts that show how unusual the housing market picture looks right now.

Housing sales have slowed sharply
So many homeowners staying in place thanks to higher mortgage rates could help put a floor on prices, but it will almost certainly be bad news for Realtors as new home sales fall off a cliff. Sales volume is already decreasing at a faster pace than during the global financial crisis thanks to the combination of deteriorating affordability and low supply of new homes hitting the market

“If we’re not going to be selling those homes at lower prices than they were purchased, that’s going to help support home price activity,” Egan says. “But on the other side of this, it means that that [the] existing homeowner is also not buying another home after they sell theirs, which we think is going to kind of exacerbate the decrease in sales volumes.”

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Related: Morgan Stanley: Are Home Prices Decelerating (podcast)