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Mortgage purchase applications are rising again. The glut of existing homes we expected as the market slowed last year never materialized. Homebuilders' stocks have surged. Goldman Sachs Group Inc. now believes home prices will fall by 6% from the peak, rather than its previous forecasted of a 10% decline. The housing analytics firm CoreLogic is even predicting a rise in home prices in 2023.
It seems the housing market is making clear what it needs to cool down: higher mortgage rates.
The strength in the housing market is an unwelcome development in the Federal Reserve's fight to lower inflation to 2%. Fed Chairman Jerome Powell spoke last year about the need for a "reset" in the housing market. To the extent the Fed's tweaking of interest rates is meant to help balance the market, the evidence so far in 2023 is that a rate of 6% is too low. To keep the economy from overheating, mortgage rates around 6.5% - their closing level on Friday - get closer to the mark.
This is a sobering reality, once again exposing the tension between the need to provide affordable, adequate housing options for people, and the Fed's goal to stabilize prices around a target of 2% inflation.
It's not hard to argue that current trends are inconsistent with 2% inflation. The economy added more than 500,000 jobs in January. The unemployment rate fell to 3.4%, a 50-year low. Home and auto sales appear to have surged. After some revisions to the data, we now know that inflation as measured by the Consumer Price Index ran hotter in the fourth quarter of 2022 than previously known, rising at an annualized rate of 4.3% in December. If inflation decelerated to 4% at the end of 2022 and then economic growth accelerated at the start of 2023, it's hard to see the path back to 2%.
That's probably going to require tighter financial conditions in the form of higher interest rates.
We've already seen markets re-price to reflect the strong jobs report. Ten-year treasury rates rose by 0.35% between the release of the January job numbers and last Friday's close. Thirty-year mortgage rates rose even more, to 6.5% from 6%.
That should help to prevent the economy from overheating in 2023, but try telling that to a would-be homebuyer who's been struggling with affordability issues for the past year. Just as they were on the cusp of affording a home as mortgage rates eased toward 6%, rates are shooting up again.
The question is what stops this frustrating cycle. Early last year the jump in mortgage rates to 5% cooled off the housing market. In December I anticipated that, given rising incomes and modest declines in home prices, 6% mortgage rates would stabilize the housing market. It turns out I was too optimistic.
Achieving the warm-but-not-hot balance the Fed wants to keep inflation inside its target range is going to take at least 6.5%. As long as the labor market remains resilient, any reduction in home buying brought on by higher mortgage rates just leads to more pent up demand driving up prices in the future. By the second half of the year, maybe 7% mortgage rates will be the level needed to keep the housing market from running away again.
We've still got to assume that raising interest rates will eventually cool the economy enough to weaken the labor market, rein in inflation and relieve some of the pressure on housing. But right now, it appears that rates may need to go higher - perhaps much higher - than appreciated only a couple of months ago. Where is the tipping point? Until we find it, don't expect conditions to get any easier for homebuyers.
The Fed believes it can't allow it.
(COMMENT, BELOW)
Previously:
• 01/06/23 The January inflation bump Americans should welcome
• 01/04/23 Why millennials are following boomers to the South
• 10/24/22 Two bright spots in a cooling housing market
• 08/18/22 Future remote workers need to network more --- in college
• 06/17/22 Housing market cooldown will only lead to more dysfunction
• 05/27/22 Welcome to our be-careful-what-you-wish-for economy
• 05/04/22 The Amazon economic indicator says inflation is easing
• 01/20/22 Don't call me on Friday. That's my 'me time'
• 01/06/22 2022 is the year to buy your first luxury electric car
• 06/03/21 The post-pandemic boom will have a sequel in 2022
• 05/31/21 Florida may lose some of its boomer shine
• 01/11/21 Colleges bet on football in their own K-shaped recovery
• 12/31/20 Just send the bigger bucks already
• 08/24/20 Young people can't buy homes until older owners . . . move on
• 08/18/20 Our pandemic love affair with e-commerce could soon sour
• 08/10/20 Booming 'zoom towns' should ease city housing costs
• 07/11/20 With a Biden economy, will America be condemned to relive the '70s?
• 07/14/20 Renting and homebuying swap roles in the covid-19 market
• 07/13/20 Markets may have a reason to rise along with covid-19 cases
• 04/27/20 U.S. economy may have hit the coronavirus bottom
• 11/12/19 The 2020 economy should feel a lot better: What to, realistically, expect
• 04/23/19: Gen Z is likely to temper aging socialist millennials
• 03/25/19: All signs point to a housing boom ahead
• 02/19/19: Trump's economic gamble might make sense
• 02/15/19: Scaring off Amazon will backfire for the Left
• 01/29/19: The 2020 election will shred the Obama coalition
• 11/15/18: Amazon proving the 'rich get richer'?
• 11/13/18: How gerrymandering can reduce the partisan divide
• 10/22/18: The politics of the next recession will be a disaster
• 08/02/18: The future of the US looks a lot like ...
• 05/05/18: Brick-and-mortar stores may start to make sense again
• 05/05/18: College admissions season is about to get much easier
• 05/03/18: Changing housing needs of millennials will change economic development
• 02/13/18: The big idea for Middle America is to think small
• 02/07/18: Dems are caught in a tax bill trap this year
• 10/25/17: Good times have come to Trump-leaning states
Sen is a portfolio manager for New River Investments in Atlanta and has been a contributor to the Atlantic and Business Insider.