Using insights from Reuters Polls and Datastream, Wadsworth Sykes gives a brief overview of the housing market in the United States, and the effect that rising rates are having on current and potential homeowners.
- To the surprise of many market forecasters, mortgage rates have more than doubled since the start of 2022.
- This has called into question the subject of affordability – is it cheaper to buy or rent in the U.S.?
- With single family homeowners predicting a decline in house sales, an injection of capital is required to keep the U.S. housing market afloat in a high-rate environment.
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Mortgage rates
Mortgage rates have more than doubled since the start of 2022 perhaps breaking a downward trend that has been in effect since the 1980s.
The continued increase in 30-year mortgage rates caught many market forecasters by surprise. Reuters Polling shows that the mean/median forecast for the 30-year was just over 5 percent at the end of Q4-2022.
On a cumulative basis, the 10-year yield and Fed Funds target rate has surpassed the 30-year mortgage, this has only happened twice in the past 15 years in 2008 and 2018.
To rent or buy?
With mortgage rates elevated, the question of affordability comes into play. Is it cheaper to rent or buy?
The National Association of Realtors shows the typical American mortgage has surpassed $1,850 while the latest Census Bureau has the median American rent ~$1,300 a month. The ~$500 difference between monthly mortgage payments and rent could be viewed as extreme compared to the last decade. However, compared to the 1990s and 2000s, the divergence seems less dramatic.
With the typical monthly mortgage payment above $1,800, the annual cost of ~$17,000 can be roughly calculated by a rolling 12-month sum, nominally this is more than ever. The price growth of monthly mortgage payments has also surpassed both core CPI and PCE in 2022.
Income
Data from the NAR indicates that the income required to qualify for a mortgage is higher than ever. Posting a roughly 25 percent on a MoM and YoY basis reaching ~$85,000.
Qualifying Income is the income needed so that mortgage payments account for 25 percent of family income.
Comparing median family income and qualifying income across the United States highlights how the rapid increase in mortgage rates has pushed qualifying income levels closer to the national median income.
The difference between these two metrics hasn’t been this tight since pre-2008.
Mortgage payments as a percentage of monthly income reached levels not seen since the late 1980s earlier this year, while effective interest rates continue to surge.
A glance at the below chart shows a decoupling of the two datasets not dissimilar to the decoupling experienced in the 2000s when mortgage payments increased faster than the effective interest rate.
The increase in mortgage payments has not been completely uniform across the United States. Interestingly, when looking the mortgages as a percent of income, the Northeast has yet to experience 20-year highs, unlike the Midwest, South and West.
Home sales
Current single-family homeowners expect sales to decline over the next six months and are rapidly losing confidence in the current market. The current outlook is noticeably different compared to the start of the year.
Once again, we look to Reuters Polling data for a glimpse into what the professionals are forecasting for existing home sales. Over the next year, the mean forecast indicates a slight dip but no dramatic decline.
The situation of affordability is a tricky one, is there enough money on the sidelines just waiting for the right price to enter the market? If so, will that capital come from individuals who have ferried away during the pandemic or from institutional investors?
Both or either of these options may potentially keep the U.S. housing market churning along in a high-rate environment.
