Mortgage rates and home prices are skyrocketing worldwide. That is not good news for housing affordability.
The graph below shows the relationship between the one-year change in US 30-year mortgage rates and the one-year change in the ‘Housing Affordability Index’. Roughly speaking, the change in mortgage rates explains about 40 percent of the change in the affordability of a home for sale in the United States.
The following graph shows the relationship between the one-year change in the average house price in the US and again the one-year change in the Housing Affordability Index. Not surprisingly, home prices also explain a significant part of affordability. Higher home prices are associated with a decline in affordability, and vice versa.
If we combine mortgage rates and average house prices, they explain about two-thirds of the changes in the affordability of an American home. With an unprecedented rise in 30-year mortgage rates over the past year of almost 2.5 per cent and a house price rise of almost 20 per cent, it is easy to guess what is happening to home affordability.
Recession
The decline in housing affordability in America, but also in most other countries, coincides with a sharp decline in consumer purchasing power due to the highest inflation in forty years. Now that the economy is also starting to slow down, the likelihood of a consumer-led recession is increasing. Consumers worldwide are being hit in their pockets from all sides. And even though equity markets and other risky investments have fallen in value in recent weeks, they still discount a limited recessionary chance. Based on the above and others, this does not seem quite right to me.
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 Investment Officer.
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