We knew that rising interest rates would impact the housing market

It took some time, but according to Bloomberg, the impact is now being felt. Here’s what they reported:

The Federal Reserve bank’s aggressive tightening since last year has driven the interest rate on a 30-year mortgage close to 8%, the highest point in almost a quarter century, adding some $1,100 to the monthly payment on a $400,000 loan. That might be manageable if higher rates led to lower prices. But the impact on supply is even more drastic because of the so-called lock-in effect: Homeowners are unwilling to let go of cheap mortgages they got when rates were scraping bottom. This has resulted in the least affordable housing market since the 1980s, with sales approaching record lows.

The key takeaway here is that this housing market is unknown territory for almost everyone under the age of sixty. 
This won’t change, until housing prices begin to come down. We saw that happen briefly in 2022, but prices rebounded in 2023. You can see what I mean in the chart below:

This is a chart of the Case-Shiller Index, a composite of home prices in 20 cities. It began in 2000 with a base of 100. The current value is 316. That means the average home price in those 20 cities rose 216% in 23 years. 

Even though the prices haven’t fallen yet, we are seeing an impact. The number of new houses started is down 25% from its peak in 2022, as you can see in the chart below:

But the comparisons to the crash in the 1980’s are a bit overblown. Today, the interest rates are around 8% (give or take). The peak interest rates in the 1980’s was 16%. More importantly, the inflation we see today is a direct result of the supply chain disruptions from the pandemic. 

The data suggests that we can expect a decline in home prices. There will be a lot of click-bait headlines about it. But the economic data outside of the housing market remains quite strong. This visual capitalist summary of 2024 economic outlook shows just how confusing the signals are right now.

But the threat of a recession is fading. The Goldman Sachs analysts cut their recession forecast to 15%. Bank of America cut its forecast to 35% – 40%. 

This is great news for stocks. We may see a pullback in 2024, as housing headlines scare investors. We will use that as an opportunity to add to our portfolio at lower prices.

Good Investing,

The Mangrove Investor Team