Home Prices Decline as Rising Mortgage Rates Hurt Demand
The U.S. housing market is experiencing a significant slowdown after two years of rapid growth. U.S. home prices declined 3.3% during the three months from June through September this year, representing the largest 3-month decline since the 2008 financial crisis. This recent price decline is a sharp reversal from 2021 and early 2022 when low interest rates boosted homebuyer demand and caused home prices to climb nearly 20% year-over-year.
The root cause of this decline is the Federal Reserve raising interest rates at the fastest pace since the 1980s, which has pushed the average 30-year fixed rate mortgage back to 2007 levels. Higher mortgage rates have made monthly payments significantly more expensive and homeownership more difficult for many homebuyers. This is having a negative impact on first time homebuyers as well as those looking to upgrade. With the uncertainty in the stock market and economy in general, many expect home prices to decline further in 2023 as buyers and sellers adjust to the new reality of higher interest rates and a decrease in demand. Indeed, new, and existing home sales are declining, mortgage applications are falling, and home builder sentiment has weakened every month during 2022. The housing market is a significant part of the U.S. economy, and its secondary effect on consumption could make it a potential headwind for economic growth. With Federal Reserve tightening forecasted to continue into the new year, it may take some time for the housing market to start its recovery.
However, it is important to remember that the stock market is a forward-looking barometer. With this in mind, we find it interesting that many of the largest public homebuilders in the US have seen their stock prices rise since the end of the third quarter of 2022, handily outperforming the overall market. While we do not discount the economic implications of what a soft housing market implies for the overall economy, we will keep a close eye on what the stock market might be implying.
Have a great week ahead,
Dennis P. Barba, Jr.
CEO & Managing Partner
Michael P. Finkelstein, CFA
Partner
Sources:
- Federal Reserve
- NBER
Wells Fargo Advisors Financial Network did not assist in the preparation of this report, and its accuracy and completeness are not guaranteed. The opinions expressed in this report are those of the authors and are not necessarily those of Wells Fargo Advisors Financial Network or its affiliates. The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Additional information is available upon request. Past performance is no guarantee of future results 1222-02098
