The U.S. housing market is experiencing a boom in home prices, with many regions seeing prices at levels not seen in more than 10 years. This is reminiscent of the 2008 housing crisis, where prices reached levels not seen since 2000.
It’s hard to find real estate economists claiming that the ongoing housing boom is heading for a bust like it was in 2008. Indeed, many argue otherwise, based on the belief that a booming demographic of first-time millennials, high wage growth, and tight supply will continue to push the market up. All major real estate companies with a public forecast, including CoreLogic and Fannie Mae, expect further house price increases next year. However, the red-hot U.S. housing market is starting to reach unprecedented since our last housing bubble.
Black Knight, a provider of mortgage technology and data, showed Fortune an analysis on Friday that showed the typical American family would now have to spend 31% of their monthly income to pay off a mid-value U.S. mortgage. This is more than 29% just a week earlier and 24% in December. Black Knight’s mortgage-to-income ratio, which averaged 19.9% during the 2010 decade, has hovered at 31% since September 2007. The economic shock caused by rising mortgage rates has significantly increased mortgage payments for new home buyers in recent weeks.
The average rate on a 30-year mortgage was 3.11% in December. A borrower with a $500,000 mortgage at that rate should receive $2,138 per month. With an average interest rate of 5% now, the loan would cost $2,684 a month if taken out today. Another $196,700 throughout the 30-year loan.
Borrowers are getting tweaked by soaring mortgage rates.
In March, researchers from the Federal Reserve Bank of Dallas caught the real estate industry’s attention after publishing an article titled “Real-time Market Monitoring Reveals Signs of a U.S. Housing Bubble.” They found that the recent rise in U.S. house prices, which increased by 19.2% over the past 12 months, is becoming “unrelated” to economic fundamentals. However, the Dallas Fed researchers do not see this as a repeat of 2008.
Of course, many new home buyers struggle financially, which reminds buyers of the latest bubble. But they’re just new home buyers. If you look at homeowners in general, they are doing well.
As of the fourth quarter of 2021, only 3.8% of U.S. personal disposable income was spent on mortgage payments. At the height of the housing bubble in the 2000s, that figure was almost double at 7.2%. Household budgets look healthier this time around, and more homeowners have paid their mortgages in full. In addition, the shady lending practice of the 2000s was regulated by the Dodd-Frank Act of 2010.
In a nutshell: if a storm hits, homeowners should, in theory, be in a better position to weather it. “Based on current data, the effects of the housing adjustment are not expected to be comparable to the 2007-2009 global financial crisis in terms of macroeconomic scope or severity.
Share of U.S. disposable personal income moving towards the mortgage payment.
Rising interest rates could cause an affordability crisis. According to HousingWire’s chief analyst Logan Mohtashami, rising mortgage rates could dampen the market and give stocks a chance to pick up a bit.
If that happens, it could slow the pace of house price growth and lessen the chance that a red-hot housing market will turn into an overheated market, or worse, a housing market downturn. “High mortgage rates are best for homes because we are in an extremely unhealthy housing market, and we need to get out of this meagre inventory,” Mohtashami told Fortune. “This time, it’s not about too much or bad credit chasing homes. Too many people are chasing too few houses. We desperately need a break.”
Rising mortgage rates are already softening the housing market somewhat, Redfin said. The brokerage platform sees slightly more listings for homes with price cuts and fewer bookings for home showings. However, we will have to wait a few weeks or months before ensuring that the housing market is indeed softening.