The Housing Market Correction

Will Higher Mortgage Rates Restore Balance to the Housing Market?

Source: Economics Group of Wells Fargo Bank, N.A.

SummaryReset Underway

Chair Powell’s recent remarks that the housing market would probably “have to go through a correction” are not surprising. For much of the past two years, housing demand has greatly outstripped supply, leading to a rise in home prices far exceeding income growth.We note that a housing “correction” is already well under way. Alongside sharply higher mortgage rates this year, existing home sales, new homes sales, builder confidence and single-family construction have all registered acute declines.We expect elevated mortgage rates and rising unemployment to lead to further pull back in housing activity in the near term.Underlying buyer demand appears strong, especially among the large cohort of younger buyers. This cohort, however, is also more sensitive to changes in mortgage rates and is at higher risk of job losses during a recession.The supply side looks just as daunting. The vast majority of homeowners hold a mortgage with a rate under 5%. Mortgage rates remaining over that level for the foreseeable future takes away much of the incentive for sellers to put their homes on the market.An increase in unemployment is likely to bring about more selling, which should boost inventory levels. However, sellers that are forced into that position might instead choose to rent their homes.