US mortgage rates have shot up since the start of this year. The 30-year fixed rate stands at 4.5 percent, the highest level since the start of 2019. Will this bring an end to the housing boom?
It seems obvious that higher mortgage rates will have a dampening effect on house prices. But just to be sure, I am doing a mini-analysis to see if this is indeed the case. Since mortgage rates, like US government bond yields, have consistently fallen over the past 40 years, an analysis with all the data in a pile is less useful.
To determine whether current mortgage rates are high or low, we compare them to the average rate over the past five years.
The graph below shows that when current 30-year mortgage rates are more than one standard deviation above average, house prices rise less than average in the following months. But they do rise.
If mortgage rates are more than one standard deviation below the 5-year average, house prices rise more than average in the following months.
The current mortgage interest rate is not high at all. At 4.5 percent, it is no more than one standard deviation above average. So, based on historical data, there is no reason to assume that US house prices will come down sharply any time soon.
Other factors
Of course, there are other factors that have an impact on house prices. A few relevant examples:
- The speed of interest rate increases is also important. With a change of 1.3 percent since the beginning of this year, one can speak without hesitation of a rapid increase. This will encourage American consumers to buy a new house quickly, after which the market could come to a standstill. In six of the last seven weeks, the number of mortgage applications has fallen.
- Consumer confidence is low. This is mainly due to inflation and its negative effect on purchasing power. People with less purchasing power are reluctant to buy a new house.
- The affordability of a mortgage is decreasing. Not only due to higher mortgage interest rates, but also due to the extremely rapid increase in house prices. However, mortgage costs as a percentage of disposable income are still very low.
- Finally, as in many other countries, there is a huge shortage of housing. The imbalance between supply and demand is huge. This supports house prices.
Summarised
Based on current mortgage rates, a crash of the US housing market is not to be expected. However, a number of factors suggest that house price rises will fall sharply. The risk here is obviously a recession.
Based on the developments in the yield curve and the more aggressive tone of the Federal Reserve, we have raised the probability of a new recession to 50 percent. If that recession does indeed come, then the party on the housing market will also stop, at least for a while.
Jeroen Blokland is founder of True Insights, a platform that offers independent research to build diversified multi-asset portfolios. Blokland was most recently head of multi-assets at Robeco. His “chart of the week” appears every Monday on InvestmentOfficer.lu.
This column was originally published in Dutch on InvestmentOfficer.nl