The market is going to take interest rates higher and the Fed will follow, as it always does. This is not good news for the housing market. From Wolf Richter at wolfstreet.com:
Raging inflation knocked out the “Fed put,” and banks are no longer on the hook for mortgages; taxpayers and investors are.
So we have a weird situation. Not weird actually. Just reality. After mind-boggling ridiculous spikes, home prices in most markets are dropping, and in some markets, they’re plunging at the fastest pace on record. And in some markets, they’re going down faster than they’d spiked on the way up. And it’s just the beginning. There is nothing magic about this.
The average 30-year fixed mortgage rate has more than doubled since last year, from less than 3%, to now over 7%, the highest in 20 years, the highest since 2002. But there’s a difference between 2002 and now: The magnitude of the home prices.
Home prices have shot up to ridiculous highs in the era of interest rate repression and money printing by the Federal Reserve. But that era ended earlier this year. Now we have surging interest rates and the opposite of money printing: quantitative tightening.
So now we’ve got sky-high home prices, and I mean ridiculous home prices, and mortgage rates that were normal when home prices were just a fraction of today’s prices.
Over the past two years, we’ve seen spikes of home prices of 30% to 60%. In the Miami metro and the Tampa metro, for example, home prices spiked by 60% in two years, according to the Case-Shiller index. Which is just nuts. And we know how this is going to end and it already ended:
With 7% mortgage rates after a 60% price spike in two years, sales have plunged, and those sales that are taking place are taking place at lower prices.
STRAIGHT LINE LOGIC 