About the authors: Chen Zhao leads the economics team at
Redfin.
Previously, she was an executive director leading housing finance and financial markets research at the JPMorgan Chase Institute. Daryl Fairweather is the chief economist of Redfin. Previously, she was a senior economist at Amazon and housing researcher at the Boston Fed.
The U.S. economy has been remarkably resilient this year even as the unprecedented speed of rising mortgage rates pushed the housing sector into deep freeze. But while it’s plausible that the era of affordable borrowing is gone for good, the story for the broader economy may change in the next few months.
Ten-year Treasury bond yields briefly broke above 5% in October, while 30-year mortgage rates have hovered around the 8% mark. Consumers will soon grapple with the harsh sting of elevated interest rates, impacting their credit card bills, auto loans, and medical debt. Businesses built on the premise of abundant and cheap capital may suddenly find themselves at the end of their financial runway. The ripple effect of potential business insolvencies could pose substantial risks to banks heavily invested in their debt. While the economy has displayed surprising resilience, it is far from invincible.
Still, the catalyst for a catastrophic economic break is likely to come from somewhere other than the housing market. That’s because home sales can’t get much worse than they already are. Sales hit record lows due to homeowners opting to retain their historically low fixed mortgage rates secured during the pandemic. This limited supply has effectively counterbalanced the waning demand. Although rising mortgage rates do soften demand for housing, transitioning from 6% mortgage rates to 8% does not inflict the same shock to buyer budgets as the leap from 3% to 6%.
We might see a modest increase in distressed sales, particularly among homeowners who were enticed by teaser rates in 2022, set to expire in 2024. This could result in a slight uptick in new listings, leading to a marginal decline in home prices. However, cash buyers are eager for discounted properties.
Cash buyers wield large influence in today’s housing market. They constitute roughly a third of all buyers—the highest share since 2014. Homeowners with abundant equity have the ability to sell and reinvest in more affordable markets, circumventing the need for mortgages entirely.
Ironically, if the economy does fracture and financial markets face turmoil, the housing market would see relief. If the economy contracts, the Federal Reserve would likely move swiftly to lower interest rates. That would render homebuying more affordable, echoing the patterns observed during the pandemic recession and the 2001 recession. Housing demand could grow, even as the broader economy falters.
In the event the economy continues to withstand the strain of high interest rates without breaking, the deep freeze gripping the housing market will likely persist for at least another year. Signs of a gradual thaw may not emerge until late 2024, coinciding with an economic slowdown as consumers grapple with personal debt. However, should the economy reach its breaking point, the housing market could become the sector that bucks the downturn.
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