"The housing market is looking increasingly vulnerable with a price correction possible," says one economist.
ING's chief international economist James Knightley points to the rapid rise in home prices making it more challenging for prospective buyers to save for a deposit at a time when inflation is shrinking real incomes and confidence is suffering.
“On top of this, the latest housing data shows that this sector is the most vulnerable to the rising rates environment with the growing prospect of a slowdown and potential correction in coming quarters,” Knightley wrote in a recent note.
The average mortgage rate for a 30-year conventional loan rose to 5.3% last week. The median cost of a home in April was still at a record high of $391,200,
House prices nationally have increased 35% since the start of the pandemic. Demand in 2020 and 2021 was fueled by massive fiscal and monetary stimulus and work-from-home options. At the same time, supply has been severely limited with construction slow to catch up.
The tide may be turning now.
Mortgage applications are plunging as borrowing costs are rising. Housing supply is expected to hit the market later this year, when demand is potentially dropping.
“Hence our belief that the rapid price appreciation of housing could quickly flatten out and possibly reverse,” writes Knightley.
“On the negative side, this will hurt consumer sentiment as raising interest rates in a deteriorating housing market environment is never a good story. It would also weaken construction activity with a lag and hurt employment prospects in the industry which accounts for 4% of GDP in total,” said Knightley.
However, there is one “silver lining of sorts.”
“Falling house prices would get inflation lower more quickly,” said the economist.
Lower inflation would allow the Fed to move to “reverse course and cut rates back to neutral more quickly, helping to prevent a broader and deeper economic downturn.”
Ines is a markets reporter covering equities. Follow her on Twitter at @ines_ferre
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