The U.S. housing market was in something of a “deep freeze” in the second half of 2022 as a sharp rise in mortgage rates caused housing activity to shrink across the country — and that spurred outright corrections in home prices to some markets. However, this is old news: Mortgage rates falling below 6.5%, combined with the onset of the seasonally strong spring sales period, have seen housing markets across the country begin to improve.
Case in point: After falling for seven straight months, US home prices tracked by Case-Shiller rose in February. The March reading, which is published at the end of May, is expected to mark another increase.
The US housing market is out of the woods, right? Well, not so fast.
Look, the housing market is entering a pivotal stage — and it’s happening on two fronts.
First, the US housing market will soon exit the peak season for home price growth. As seasonal spring and summer demand recedes and the market moves into the slower fall and winter months, some vulnerable housing markets may slip back into correction mode. Other markets could simply see activity levels, along with existing inventory levels, return to the so-called “deep freeze.”
The average 30-year fixed mortgage rate over the past 12 months 👇
Red = 7 handle
Green = 5 handle pic.twitter.com/hXZlI9rCYX— Lance Lambert (@NewsLambert) May 20, 2023
Second, mortgage rates could test 7% again. The average 30-year fixed mortgage rate rose again last week – closing last week at a two-month high of 6.90%. If mortgage rates remain there for an extended period of time, or even rise, this could cause both buyers and sellers to start pulling back again, just as they did in the second half of 2022.
The near-term outlook for mortgage rates is, of course, complicated by debt ceiling talks expected to resume on Monday. In the unlikely scenario that the U.S. Treasury defaults—or even looks like it might—financial markets could put upward pressure on long-term interest rates like mortgage rates.
Another big jump in mortgage rates would be a gut punch for many buyers who were burdened by last year’s mortgage rate shock. National housing affordability (or rather, the lack of affordability) has now reached levels not seen since the housing bubble era.
“Any major disruption to the economy and debt markets would have major implications for the housing market, cooling sales and raising borrowing costs, just as the market was beginning to stabilize and recover from the big cooldown in late 2022,” the economist wrote. by Zillow’s Jeff Tucker in a recent report. In the “highly unlikely” scenario of the US defaulting, Zillow says the average 30-year fixed mortgage rate will jump to a peak of 8.4% by September.
While it’s hard to imagine a default actually occurring, it’s easy to see how uncertainty could cause financial markets to raise long-term interest rates, such as mortgage rates, just as the housing market exits its seasonal bull run.
Want to stay up to date on the housing market? Follow me on Twitter at @NewsLambert.