by Brad Houle, CFA
Principal
Fixed Income Research and Portfolio Management
In recent months, we have received a number of questions from clients regarding the possibility of another housing crisis. While we do not see a housing crash like the one experienced in 2008, there is a different type of disruption in the residential real estate market. Mortgage rates, which are strongly influenced by long-term Treasury bond yields, have increased from less than 3% to more than 8% at their recent peak. The income required to buy the average home in the U.S. has gone from $74,000 in 2020 to $114,600 in 2023. Incomes have not kept up with the steep increase in housing prices and the cost to finance the purchase of a home.
Housing can be heavily influenced by interest rates. The low interest rate environment after the financial crisis until the recent spike in interest rates helped to drive housing costs sharply higher across the country as home ownership became more affordable to many people. A question that we are asked frequently is, will the increase in interest rates have the converse impact and cause home prices to decline? To answer, we need to first point out that single family housing has been undersupplied since well before the 2008 crisis. The chart below depicts the undersupply of new single-family homes relative to new household formation.
Given this backdrop, what should the impact of higher interest rates be on the housing market? The current housing circumstances are not a decline in prices and foreclosures as we saw in 2008. The current housing market is not so much a crisis as it is the effect of the chronic lack of supply. Around 30% of homeowners have no mortgage and the average interest rate on outstanding mortgages in this county is 3.9%. As a result, except in the cases of death, divorce and relocation, few people want to move and be subject to much higher mortgage rates. The rapid home price appreciation recently experienced has come off the boil, and there have been some modest price declines in some parts of the country.
The economics of buying versus renting a home strongly favors the decision to rent in most parts of the country at this time. According to research from CBRE, the average new mortgage payment is 52% higher than the average apartment rent. We acknowledge current homeowners are in the best shape with significant equity and low interest rates. This market dynamic significantly impacts first-time homebuyers and those people that are forced to move for other reasons.
Elsewhere this week we saw the November jobs report with an increase of 199,000 jobs which is much stronger than was expected, and the unemployment rate ticked down to 3.7%. This report confirms that the labor market remains robust. However, in the context of a longer-term view, the labor market is cooling and coming back into equilibrium.
Takeaways for the Week
We are not anticipating a housing crash; a lack of supply is the primary challenge facing the market
Renting for now makes more sense for many first-time homebuyers in most markets