Is the US housing market about to crack?

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Calculated Risk recently argued that the correct analogy for the US property market this rate hiking cycle is not 2008 but the 1970s. Back then, prices fell in real terms while posting slight nominal gains but the real action was in new starts which boomed and busted with inflation and rate cycles. That pattern may well be already playing out. Morgan Stanley has more. 

Home Price Growth Holds in Near Record Highs: After a brief period of deceleration, home price growth has remained steadfast right around +19%-it accelerated this past month from 18.8% to 19.2%. While home price data is lagged, and therefore the full extent of the increase in mortgage rates that we have experienced is not yet reflected in the numbers, affordability pressures had been growing well before the experience of the past several weeks. This deteriorating affordability is becoming apparent in housing activity, but not home prices. We believe the primary reason for that has been a supply environment that continues to plummet. In fact, rising mortgage rates themselves are contributing to this dearth of supply. The overwhelming majority of mortgages outstanding today are fixed rate. This means that current homeowners are not seeing their monthly payments rise as mortgage rates increase. Instead, they are more likely to be locked into their current home, as moving would entail taking out a mortgage at a much higher rate on the purchase of their subsequent home. Put another way, while rising mortgage rates decrease affordability for first-time homebuyers, they also decrease supply from existing homeowners, and that seems to be putting upward pressure on home prices and should continue to support home prices going forward.

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About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.