About the Author: Susan Watcher Sussman Professor of Real Estate and Professor of Finance at the Wharton School of the University of Pennsylvania and co-director of the Penn Institute for Urban Research. She is currently a member of the Advisory Committee on the Bureau of Economic Analysis of the Department of Commerce.
America housing market has entered an unusual and confusing phase. House prices and rents keep rising year after year at historically high rates. But the manufacturing and selling activity are at the kind of low level that is typically characteristic of a recession, Rent and housing-cost equivalents account for more than 40% of the Consumer Price Index and their rise is a major contributor to inflation. Despite higher prices, developers are walking away from deals, and companies are halting production mid-process. Sales activity is also falling. What is the reason for these seemingly contradictory results?
Manufacturing-industry profits are low due to high input costs. Supply constraints are reducing profits as construction costs rise faster than prices. The new construction list is growing. But the major source of home inventory for sale is the pool of existing homes, and that inventory is still low.
The reason for the decrease in inventory is monetary policy. In an unintended consequence of the Federal Reserve’s ongoing rate hikes, monetary policy is creating a lock-in effect that prompts existing homeowners to stay put. When interest rates rise, homeowners often decide to maintain their attractiveness. mortgage Rate and don’t go to another house. Instead, they may make home improvements, or simply stay in their current living situation.
Expected inflation contributes to demand, especially from investors, who often use housing as an inflation hedge. But it also motivates homebuyers who still want to take advantage of relatively low Pledge of all when average mortgage rate Around 5.9% may seem high, for those who are tempted to buy, the mortgage is a one-off bet they cannot afford to lose. If rates continue to rise, borrowers can lock in at today’s rates and, if they fall, they can refinance. Furthermore, although rates have doubled since March, and are now the highest since November 2008, they are still historically low and, adjusted for inflation, remain low. Rates and prices are making it difficult for the average person to buy a home, but demand is high for those who can qualify. The largest segment, the largest segment, of the US population aged 32-36 is in prime age to buy a home.
For home buyers who can afford monthly mortgage payments based on their income, coming up with a down payment is usually the hardest hurdle to overcome. But this time it is less. Since the start of the pandemic, households have amassed several trillions of dollars in incremental savings. This savings increase has enabled many households to withstand an early rise in inflation, and it has given them a buffer against the effects of rising prices. Further, the investor share of home purchases, which is not affected by any constraints, is at an all-time high.
Nonetheless, current home sales fell 20.2% from July 2021 to July 2022. Mortgage applications for purchases are down 23% as of early September. Many would-be buyers are finding it difficult to qualify for a standard mortgage with affordability, at a 33-year low, in the National Association of Realtors Index. For June 2022, the most recent Case Schiller data shows an 18% increase in home price year over year, but Black Knight data shows the national market is changing, with prices falling by about 0.8% in the month of July . The average selling price, which reflects the structure of sales, is also declining. The average price reached $440,000 in the second quarter of 2022. In July, the median current home selling price was $403,800. While this represents an increase of 10.8% from a year ago, it marks a decline of $10,000 from the June 2022 record high of $413,800.
Amidst this dynamic, Fed Chairman Jay Powell Signal Last month in Jackson Hole, Va., that monetary restraint will continue until it works. The Fed’s position matters because declining inflation expectations and an overall slowdown of the economy provide a way to ease the supply shortfalls of housing markets. When this happens, buyers will likely face a price drop, with the effect of a shock in previous high-growth markets. The recession would cause mortgage rates to fall and the lock-in effect to decrease, prompting some homeowners to sell because they no longer fear losing their remuneratively priced mortgage. Inventory would then grow in a self-reinforcing growth, as there would be no reason to wait on inventory due to a lack of inventory. Inventory shortfall is likely to be overcome quickly and with this the price hike will also reverse.
Already we see the list of newly built homes rising to new highs, which is why the construction industry is in recession and the prices of new homes are falling. The only good news is that the resulting lower owner’s housing costs and rents will equate to a smaller increase in the CPI. The resulting inflation relief will get us back into economic growth.
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