Housing: Heartburn, Not a Heart Attack

When interest rates go up, many analysts start to worry about recessions. That's not wrong to do, after all Federal Reserve rate cycles are important. Lately, the market has settled on expectations for a total of about 2.25% or more of interest rate hikes this year. The result is a jump in many longer-term yields. The 10-year Treasury yield is 2.77%, while the typical 30-year mortgage has climbed from 3.2% in December, according to Bankrate.com, to 5.1% recently.

So, some analysts think that a housing bust is likely, which would drag down the entire economy. We certainly agree that higher mortgage rates will be a headwind for the housing market in the year ahead. But what we see is some heartburn, not a heart attack.

While 5% mortgage rates are high relative to where they were, home prices should still rise 5 - 10% this year, meaning home prices either keep up with or exceed borrowing costs. Real mortgage rates (the rate minus inflation) are still negative.

Negative real rates are also why we are not yet worried about an inverted yield curve from the 2-year Treasury to the 10-year. In the past, when inverted yield curves preceded recessions, real interest rates were positive, not negative.

Now, back to housing...It is true that national home prices have soared in the past couple of years. However, so have construction costs. The Census Bureau's price-index for single-family homes under construction, which does not include the rising cost of land, is up around 25% from two years ago. For 2022, we expect mortgage rates to help slow national average home price increases versus 2020-21, but for prices to still go up in the 5 - 10% range.