- A recession in the US market has already arrived as mortgage rates soar, according to ING chief economist James Knightley.
- Demand for mortgages has fallen 30% since the start of the year and sales transactions are starting to slow.
- “A slowdown in the housing market will weaken US growth, but it’s also important to remember that it will also dampen inflation,” Knightley said.
According to ING Chief Economist James Knightley, a recession in the US housing market has already arrived as potential buyers shy away from transactions due to soaring mortgage rates.
In a note to clients on Wednesday, he also said lower house prices could provide some relief from inflation and the Federal Reserve’s tightening cycle.
Knightley pointed out that mortgage rates of nearly 7% have led to a sharp drop in demand for homes due to affordability being “pushed to the limit”.
Higher mortgage rates, which have doubled over the past year, mean the typical monthly payment has jumped to $2,600 a month from $1,550 just a few months ago.
“On an annual basis, this equates to 43% of median pre-tax household income. By benchmark, typical annual new mortgage payments for buying a home were 26% of median income in the fourth quarter of 2019. and 37% at the height of the housing bubble in 2006,” Knightley said.
Mortgage applications are down about 30% since the start of the year and home sales transactions are starting to show signs of slowing. At the same time, the supply of new homes for sale is expected to rise as housing starts and building permits hit 16-year highs at the start of the year.
The combination of falling demand and rising supply means house prices are expected to drop significantly. In fact, the most recent data from the Case-Shiller Index showed that annual home price growth slowed to the fastest pace on record in July, with some of the hottest markets posting declines of as much as a year. month to month.
“We’ve only seen one monthly decline in property prices, but with increased supply in the market at a time when demand is rapidly weakening, that implies prices are falling further,” Knightley said. .
With home valuations looking stretched based on the ratio of existing home prices to median household income, he estimated that home prices would need to fall 20% from peak to trough for the ratio to return to its long-term average. term.
But don’t expect an impending decline in housing to mirror what happened during the 2008 global financial crisis, the note says.
Indeed, household balance sheets are in good shape, with household assets having doubled to $163 trillion since their pre-2008 peak. Meanwhile, household liabilities have only increased by $5 trillion. to reach $19 trillion over the same period. And on top of that, the proportion of equity owners have in their property sits at the highest level since 1983 at 70.5%.
“With financial regulation having been significantly tightened since the global financial crisis, the risk of catastrophic loan losses and major strains on the US financial system, even in a scenario of a price drop of more than 20%, appears low,” Knightley said.
Falling home prices are ultimately a good thing for first-time homebuyers and others who want to buy a home as the housing market shifts from a buyer’s market to a seller’s market for the first time For years. Falling house prices are also a good sign for the Fed, which is watching for potential signs of a spike in housing and rent-related inflation.
“The Fed wants a correction,” Knightley said. “A slowdown in the housing market will weaken US growth, but it’s also important to remember that it will also dampen inflation.”
He concluded: “We may soon be at a turning point in the annual rate of change of these key components of CPI rent, which, if at all, can significantly reduce consumer price inflation until 2023 and likely help bring the US inflation rate back towards 2.% by the end of 2023. While the Federal Reserve is downplaying this possibility, we strongly believe that interest rate cuts will be on the table in the future. second half of 2023.”