Housing Market Downturn – Is A Recession On The Horizon?

The second half of 2022 has seen declining house prices. However, prices remain up year-on-year based on steady price gains in the first half of the year. The decline in pricing is, in part, driven by higher mortgage rates hitting affordability of housing. However, most markets have not seen year-on-year declines in house prices yet and regional trends mean the west coast is being hit harder than other markets.

Rising Mortgage Costs

A central issue is the spike in mortgage costs. 30-year mortgage costs touched 7% in early November, mortgage costs remain at levels we haven’t seen since 2007. This is driven by high inflation causing the Fed to raise interest rates sharply, which correspondingly increases mortgage costs.

Lower Housing Affordability

Higher mortgage costs have reduced housing affordability. That’s because for many people the house they can afford is determined not by the house price, but by the mortgage cost they can comfortably service from their paycheck.

Broadly speaking, in 2022 we’ve seen mortgage costs double and so housing affordability has fallen sharply. The Atlanta Fed tracks this and sees housing affordability at very low levels compared to recent history. In fact, housing affordability is at the lowest level since the Atlanta Fed started tracking it in 2006.

Prices Sliding

House prices are sliding, but have not collapsed. Redfin house price data suggests house prices have been in decline since May 2022, though prices remain up 5% year-on-year, down from 15% annual price increases over the summer.

We haven’t seen absolute house price declines on an annual basis in most markets, but that could be coming over the next few months. The fall and winter period can be a slow time for the housing market, so we may be seeing some seasonal trends too. The spring is typically the start of a more robust period for the housing market, so trends in early 2023 will be telling as to the direction of house prices.

Regional Trends

Regional trends matter too. The west coast is currently seeing a relatively weaker housing market, but the southeast is holding up better. Still, despite regional variation, most regions are seeing prices move lower month-on-month.

What’s Next?

One key question for the housing market over 2023 will be where long term interest rates move. Interest rates have moved up in 2022 on inflation concerns, and as the Fed increases short-term rates.

However, since early November longer-term rates have nudged down slightly. If that continues it may correspondingly bring down long-term mortgage costs from currently elevated levels. However, the Fed is relatively hawkish on rates, and if the Fed is more aggressive with rate moves in 2023 than currently expected, that could mean further pain for mortgage costs.

Either way, if the spike in interest rates don’t materially drop in 2023, which markets don’t foresee, mortgages costs will remain high relative to recent history, putting continuing pressure on housing affordability and potentially house prices.