Rising inflation to reduce demand for homes, study finds
The mortgage industry can expect a tough road ahead due to high inflation, which has “spooked” the Federal Reserve, and the threat of defaults should unemployment begin to rise, according to Chris Stroud, co-founder and chief of research at national real estate brokerage, HouseCanary.
Last week, the Federal Reserve hiked the base rate by 0.75 percentage points – the third increase in a row - in a bid to tame stubbornly high inflation.
Although the move had been widely expected, there is deep concern in the markets about the increase as the Fed’s target range has now jumped to between 3.75% and 4%, the highest level since January 2008, raising fears of a recession and dashing hopes that the Fed will be able to achieve a “soft landing” for the US economy.
Meanwhile, recent research by HouseCanary has indicated that rising inflation is a main driver of the year’s housing market cooldown, as both potential buyers and would-be sellers are sitting on the redlines.
It said rising inflation, which currently stands at 8.2%, and the Fed’s response to it will further drive demand down for mortgages, hitting purchase and refi volume. This is turn will lead to lower house prices.
Read more: Consumer sentiment on housing market tumbles to record low
Speaking to Mortgage Professional America about the findings, Stroud said: “It's going to be a tough road on the mortgage side. There's no doubts about that. The refi market is largely going to be nonexistent for a while.”
He added that US housing was in a “strange situation” where despite not having many homes for sale, there was a reduced demand that was driving prices downward.
“You have a decreasing price environment in a low supply environment. I'm not aware of a market that's been like this in the past with those two elements,” he said.
Analyzing the Federal Reserve’s decision to increase rates yet again, he pointed out that inflation had remained higher for longer than expected and that many of the current inflation issues were “supply side driven”, meaning the Fed was less able to apply direct monetary control.
“What's kind of got the Fed spooked is that almost each month there's been a lot of expectation - at least in the financial media - that ‘oh, we're going to see a nice strong deceleration of this inflation’, and it's yet to happen.”
He also expressed concern about what might happen if the economy took a turn for the worse and the country was plunged into a deep recession.
“One of the key risk factors that has prevented any kind of sizable amount of default starting to occur [is that] households are still able to make their payments; they’re still able to stay current on their mortgage.
“If that changed, and you had a huge unemployment situation, it's inevitable that probably defaults would start after that, and then foreclosures follow from defaults. But as long as the job market stays strong and people can still make their payments that they're locked into, I don't see a huge default or foreclosure risk at this point.”
The latest data from the US Bureau of Labor Statistics shows that the unemployment rate increased slightly in October to 3.7% from 3.5%, although the number of jobs grew slightly by 261,000.
Read more: US foreclosure activity soars to almost pre-pandemic levels
And according to a recent report for real estate data firm, ATTOM, lenders started the foreclosure process on a total of 67,249 properties across the US in Q3 – revealing a massive 167% jump from a year ago. However, this was still below pre-pandemic levels.
Stroud however said that if the Fed can bring inflation under control, it will pivot away from implementing aggressive rate hikes, which he predicts will provide economic relief during the second half of 2023. Failing that, rate hikes could become the norm well into 2024, which would “crush demand” for homes.
In any case, he said he did not expect house prices to drop “anywhere close to 20-25%” over the next year, despite conceding that “a lot of markets” are overpriced.
“If rates stay where they're at during the next 12 months, I would expect to see continued moderate price declines, which is kind of what we saw starting in August,” he said.
