The U.S. economy has shown incredible resilience this year, despite the rapid increase in mortgage rates that has brought the housing sector to a standstill. While it’s possible that the era of affordable borrowing may be coming to an end, the outlook for the overall economy may take a different turn in the coming months.
Rising Interest Rates and Their Impact
In October, there was a brief period when ten-year Treasury bond yields exceeded 5%, and thirty-year mortgage rates remained around 8%. As a result, consumers will soon feel the harsh sting of higher interest rates, affecting their credit card bills, auto loans, and medical debt. Businesses that have relied on cheap and abundant capital may suddenly find themselves facing financial constraints. This could have a ripple effect on banks that have heavily invested in these businesses, potentially posing significant risks.
Looking Beyond the Housing Market
Despite these challenges, it’s important to note that a catastrophic economic collapse is unlikely to be triggered by the housing market. The reason for this is simple: home sales cannot get much worse than they already are. Record-low fixed mortgage rates, obtained by homeowners during the pandemic, have led to a decrease in supply as these homeowners choose to hold onto their favorable rates. This has effectively balanced out the diminishing demand. While rising mortgage rates do impact housing demand, the transition from 6% to 8% rates does not have the same shock factor as the leap from 3% to 6%.
In conclusion, although the housing sector is currently facing various obstacles, the U.S. economy has proven its resilience. The potential risks lie elsewhere, beyond the housing market. As we move forward, it will be crucial to monitor how rising interest rates impact consumer spending, business operations, and banking institutions.
The Future of the Housing Market
As we look ahead to the future of the housing market, there are a few key factors that could influence its trajectory. One potential development is the increase in distressed sales, particularly among homeowners who were enticed by teaser rates in 2022, set to expire in 2024. This could lead to a slight uptick in new listings, resulting in a marginal decline in home prices. However, despite this situation, cash buyers remain a prominent force in the market.
Cash buyers hold considerable sway in today’s housing market and make up approximately one-third of all buyers, marking the highest share since 2014. Homeowners who have abundant equity can take advantage of this by selling their homes and reinvesting in more affordable markets without the need for mortgages.
Interestingly, if the economy experiences a fracture and financial markets face turmoil, the housing market could find some relief. In such a scenario, the Federal Reserve would likely move swiftly to lower interest rates, making homebuying more affordable. We’ve seen this pattern during the pandemic recession and the 2001 recession, where a decrease in interest rates stimulated housing demand even as the broader economy struggled.
On the other hand, if the economy continues to endure the strain of high interest rates without breaking, the stagnancy currently gripping the housing market is likely to persist for at least another year. Signs of a gradual thaw may only emerge towards the end of 2024, coinciding with an economic slowdown as consumers navigate personal debt. However, it’s worth noting that should the economy reach its breaking point, the housing market could be the sector that defies the downturn.