US mortgage rates recently climbed to their highest level in twenty years, yet house prices continue to rise. Mortgage delinquency rates are close to an all-time low, construction activity has held up well and the mortgage debt service ratio is low by historical standards. What is going on and how is the US housing market showing such resilience in the face of higher rates?
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A key reason that prices haven’t fallen is down to a lack of movement in the market; homeowners, having locked in lower mortgage rates over the past few years, are currently reluctant to move, which would force them to switch onto a higher rate mortgage. The fact that many homeowners have locked in low rates also helps explain the low debt service ratio (although that may be attributed to higher salaries and lower mortgage debt, as a share of GDP). The lack of any movement is reflected in the chart below, which shows that sales of existing homes and the Mortgage Bankers’ Association’s Purchase Index are close to or at 25-year lows.
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With people not moving, fewer homes are available for sale, even when new construction is factored in. This limited supply looks to be propping up the prices of homes that are available for sale.
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This does not feel like a stable equilibrium: affordability for those that do not own a home (through higher prices and mortgage rates) will reduce demand for new and existing homes, dampen supply and put downward pressure on prices; those that do need to refinance or who have recently bought homes on higher rates could fall behind on payments if the economy turns and unemployment rises. While lower prices would be welcomed by some (those that do not own a home), they are not welcomed by others (homeowners) – lower prices could tip some into negative equity with associated economic and financial stability risks.
There could also be broader economic implications: reduced housing market activity reduces demand for associated services such as mortgage broking and income for estate agents. With many now expecting high interest rates to persist longer than previously anticipated, sentiment among homebuilders – a large employer and important part of the economy – has declined.
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The bottom line is that this could turn out to be a story of pain delayed rather than pain avoided for homebuilders, homeowners and those that need to move home.
The views expressed in this article are the views of the author, not necessarily those of LSEG.
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