Mortgage rates have been rising throughout 2022, and the pace has accelerated since March, ending the week of April 21st above 5% for the first time since 2011.
This increase in borrowing costs is starting to have an impact on current and future expected single-family activity. Some of the impact is driven by the decline in what potential buyers can obtain for the same monthly mortgage payment. In a scenario where a buyer is targeting a $1,500 monthly mortgage payment, a 3% fixed rate thirty-year mortgage would allow them to purchase a home worth a maximum of $355,000. If mortgage rates increase to 5%, that same $1,500 monthly mortgage payment only allows them to buy a home worth a maximum of $282,000 (20% decline).
The most immediate impact on the single-family housing market is a decline in transaction activity as sellers have to reevaluate whether or not they are willing to sell at the new market levels. Builders also have to determine if they think homes will sell for enough to offset their costs and if demand will be strong enough to clear their future inventory of completed homes. This is starting to be reflected in the single-family housing data.
In March, existing home sales seasonally adjusted annual rate declined to 5.77 million. This was a -2.7% decline from the February level and a -4.5% decline on a year-over-year basis.
In the month of March, single family housing starts declined -1.7% month-over-month and -4.5% year-over-year.
Single family building permits also slowed in March, down -4.8% from the February pace and -3.95% year-over-year.
Builder sentiment is also being negatively impacted by the increase in mortgage rates. The National Association of Home Builders (NAHB) Housing Market Index declined from 79 to 77 in the month of April. That was the lowest level in seven months. Current sales activity and prospective buyer traffic declined while expected future sales increased.
Current mortgage application data does not support the future optimism from the NAHB Index as the Mortgage Bankers Association (MBA) purchase application index declined -3% week-over-week. This brings the April month-to-date index to a level -14% below the start of 2022 and the lowest absolute level since August 2021.
A slowdown in single family housing activity could have an impact on the growth rate of the Consumer Price Index (CPI) as shelter is the largest component and home prices play a large role. The monthly rate of change for Owners’ Equivalent Rent (what an owned home would rent for) has not changed since September 2021 and the year-over-year growth rate in the Case Shiller Home Index has slowed slightly since August 2021. The February update will be released on April 26th, and this is the last month before the prior year comparison set becomes more difficult as home prices increased above 2% from March-June 2021.
Higher mortgage rates negatively impacted the single-family housing market in the month of March, and interest rates increased in the month of April. A continued decline in housing activity could spill over into pricing as buyers are unable to afford current market prices, which could start to lower the rate of change for inflation measures like CPI.
The views expressed herein are presented for informational purposes only and are not intended as a recommendation to invest in any particular asset class or security or as a promise of future performance. The information, opinions, and views contained herein are current only as of the date hereof and are subject to change at any time without prior notice.