15 Years Ago, the Housing Market Crashed Under Similar Circumstances

Fifteen years ago, in the first quarter of 2007, U.S. housing prices were at an all-time high. According to the St. Louis Fed, the median price for a home was $257,400, a record.

The Fed was raising interest rates. After a series of rate hikes, the Fed funds rate reached 5.25%, its highest point in six years.

We didn’t know it at the time, but a multi-year recession was about to begin. The Great Recession officially began in late 2007, and lasted 18 months. Housing prices were about to experience a contraction of historic proportions.

Fifteen years have passed, and we are about two weeks away from the first quarter of 2023. The most recent data from the St. Louis Fed shows U.S. housing prices at an all-time high. The median price of a U.S. home is $454,900, a record.

Source: St. Louis Fed

The Fed is raising interest rates. Earlier this week, the Fed funds rate reached 4.5%, its highest point since 2007. Some of the top business leaders in the country, including Andy Jassy of Amazon (AMZN) and Mark Zuckerberg of Meta Platforms (META) , are flagging economic difficulty ahead as they lay of thousands of workers.

Are housing prices about to experience another historic contraction?

Assume a buyer purchases a median-priced U.S. home for $455,000. The buyer makes a down payment of 20%, or $91,000, creating a mortgage of $364,000.

Two years ago, a 30-year fixed-rate mortgage featured an interest rate of 3.25%. This would have generated payments of $1,584 per month, not including taxes and insurance.

Today, a 30-year fixed-rate mortgage comes with an interest rate of about 6.5%. Today’s payment on a $364,000 loan would be about $2,300, an increase of over $700 per month compared to two years ago.

Meanwhile, the same consumer who is faced with this payment is struggling to make ends meet, due to historically high inflation. This removes a significant amount of demand from the housing market. More demand will be removed if jobs are lost during a recession.

Despite all of this, the home building stocks are doing well.

The bellwether S&P Homebuilders SPDR (XHB) has gained about 18% since bottoming on October 21. XHB has climbed above its key 50-day (blue) and 200-day (red) moving averages.

Chart Source: TradeStation

If you have profits in the housing sector, I’d use this rally as an opportunity to exit these stocks.

Fifteen years ago, under somewhat similar circumstances, the housing market was about to crash. While the lending abuses that occurred back then haven’t been repeated, the economic reality for millions of Americans remains undeniably stark. While we probably won’t see a repeat of 2008, housing is likely to underperform in 2023.