Weekly Market Update August 22, 2022

Few markets are as sensitive to changes in interest rates as housing. Of course, interest rates are not the only factor to consider when buying a home, but they can play a major role in the price a consumer can pay. For many home buyers, particularly first-time home buyers, the monthly mortgage payment is of primary importance.

Lower interest rates allow home buyers to afford a higher-priced home, while increases in rates can reduce the buying power of the same monthly payment. Hence, as the Federal Reserve has embarked on its path of raising rates to combat inflation, it is not surprising to see the housing market show signs of slowing.

This week’s chart shows changes to existing home sales, as opposed to new home sales, and we can see the impact of several different factors. The onset of the pandemic led to a quick decline in home sales as uncertainty was widespread. We then saw a rebound almost as fast and even greater in magnitude as the Fed responded to the pandemic by lowering interest rates. Many started to seek the refuge of less dense housing with a focus on single-family homes instead of large apartment and condo developments. A move from urban centers to surrounding suburbs also added to demand.

Sources: Bloomberg

These trends led to rapidly rising home prices which reduced the positive impact of lower rates, but demand was so strong that prices continued to increase. However, higher interest rates applied to these higher prices are now negatively impacting housing affordability to a level that home sales are decreasing. Inventories of homes for sale remain low, and home builders have reduced new home starts; thus, home prices might be slow to fall, but the number of people who can afford to buy a home has declined.

A softer housing market will likely reduce overall economic activity in the months ahead.

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