A 7% Solution? | The Perryman Group

A 7% Solution?

By: Dr. M. Ray Perryman
Published in syndication November 02, 2022

The rate on 30-year mortgages has topped 7% for the first time in more than 20 years. The sharp rise from about 3% just a year ago is causing fallout for homebuyers and the housing market. While the current situation is going to be costly from several perspectives, a market crash akin to the Great Recession of 2008 is NOT in our future. Let’s briefly explore.

The rate hike has substantially increased the monthly payments for buyers. In fact, for those purchasing a median-priced house, monthly outlays are up by 75% or more compared to a year ago. Given the fact that home prices have been pushed up in recent years, many (particularly first-time homeowners) are either priced out or in search of smaller homes.

Sellers (including homebuilders) are also faced with difficult decisions given the rapid nature of the change. What was a market where listings sold almost immediately often for well over asking prices (which were themselves escalated) is now one where buyers are more skittish. In addition to the impact of interest costs, uncertainty about the economy is causing some to pause, with a wait-and-see mentality gaining traction. Prices have started to fall in most markets, with analysts projecting further declines.

Banks and other lenders have also been affected. In addition to fewer mortgages, there is also very little refinancing to be done. In the recent past with historic low interest rates, the numbers of homeowners who could benefit from refinancing approached 20 million. Now, virtually no one would be better off, and mortgage bankers are feeling the pinch.

The primary reason for the dramatic increase in mortgage interest rates is, of course, Federal Reserve action to tame inflation. Slowing in the housing market is only one of many side effects which, over time, will slow economic expansion and reduce upward pressure on prices. Once that is accomplished (hopefully without excessive harm to the growth trajectory), we will likely see some relaxing of Fed policy and a return to lower rates.

Until then, I expect that the prices of houses continue to drop, which is not all bad news given how sky high they had been. I do not expect a major correction, however, because unlike at other times when that has occurred (such as in the wake of the Great Recession), there has not been excessive overbuilding fueled by speculation rather than population growth or lax lending standards. In fact, because of persistent supply chain challenges, inventory remains relatively modest. The Texas housing market currently has less than three months of supply, which is quite low by historical standards.

It's no doubt going to be a challenging time, but not one with extreme duress. Stay safe!