The worst interest rate upturn since 1994 is likely to produce the worst housing downturn in over a decade
The worst interest rate upturn since 1994 is likely to produce the worst housing downturn in over a decade
No economic news of note today; but tomorrow we will see housing permits and starts for March, and on Wednesday existing home sales. So let’s take an important look at housing.
The recent increase in mortgage rates to over 5% is the most serious interest rate threat to housing in at least the past 30 years. As the below graph shows, the increase in over 2% is the biggest jump in mortgages since 1994:
But additionally, in 1994, when interest rates jumped from 6.75% to 9.25%, that was a 37% increase in monthly mortgage costs. The jump in the past year from 2.65% to 5.00% makes for an 89% increase in monthly costs. In other words, in 1994 a $1000/month interest payment jumped to $1370; in the past year a $1000 payment would jump to $1890!
And housing is very responsive to mortgage payments. Here’s a graph I have run many times before: the YoY change in mortgage rates (inverted, so that an increase in rates shows as a decrease; and *10 for scale), compared with the YoY% change in housing permits. Typically, I only run this graph for the last 10 years; this time I’m taking it all the way back to before 1994:
The YoY change in mortgage interest rates now has only been matched by the 1994 change. In response, in 1995 housing permits were down -10% YoY, and 15% from peak to trough, as shown in the graph below of permits for the last 30 years:
The question, of course, is a 10% YoY decline from where. From the recent 1.9M high, the 1.6M low last summer, or somewhere in between? If the decline is 15%, as in 1994, that would take us back down to 1.7M permits.
And I do expect a downturn. In 2013-14, there was less of a downturn than would be typically expected, partly because of pent-up demand from the Housing Bust, and partly due to the demographic tailwind of the Millennial generation reaching home-buying age. Neither of those buffers exist any more.
Because of the effect on monthly interest payments, as discussed above, I suspect it will be worse. And that would almost certainly have enough impact on the economy next year to put us close to if not in a recession, all by itself.
corn and natural gas both hit decade highs over $8 yesterday…so why am i noting that on a housing thread? because the Fed intends to raise interest rates until it gets inflation under control….advice to duck and cover is appropriate…
since the only ‘prescription’ we get to solve inflation seem to include extreme pain to 99% of the population by raising rates, which eventually does work, at massive cost to the 99%. one wonders if that is intentional, and ignores any other option, but they favored one of just a few
That would explain the rush to build and get people into the new homes that I see around me. Nearly as I can tell, the new owners are moving in as soon as the house is certified for occupancy.
The local paper just did a story on whether or not people would commute over Cajon Pass for a home in the $300,000’s. A quarter of a million people already moved up the hill to save money on housing. Also one of the hardest hit places when housing crashed. The new planned development calls for 15,000 new housing units. Folks up here were car pooling down the hill 30 years ago. It also remains to be seen if the $300,000 price point holds up. The tract near me jumped $25K between the original billboards and the final sales prices.
The good news locally is that they do not seem to be building much on spec and appear to have buyers already lined up before they start to build. The local economy is more diverse than just housing now, a result of the last housing crash. That doesn’t mean that a housing downturn wouldn’t hurt.