The direction of prices in the housing market is mostly dependent on three factors: mortgage rates; income; and home buyers’ perceptions. Right now, all three of these factors suggest that home prices could fall this year.
Mortgage Rates
First, mortgage rates have risen sharply. In April 2016, the interest rate on the standard 30-year fixed mortgage was 3.61%. By April 2017, that rate had gone up to 4.05%. (Source: “Monthly Average Commitment Rate And Points On 30-Year Fixed-Rate Mortgages Since 1971,” Freddie Mac, last accessed May 29, 2017.)
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And interest rates will only move higher this year, as the U.S. Federal Reserve makes good on its promise to raise its benchmark federal funds rate (FFR) two more times in 2017.
At the very core of this issue, higher mortgage rates will reduce demand in the U.S. housing market, since the cost of carrying a home increases with higher rates.
Income
Speaking of home affordability, incomes have barely kept up with inflation and are still sharply lower than they were in 2009.
The chart below shows the year-over-year percentage change in the average hourly wage of employees in the private sector.
(Source: “Average Hourly Earnings of All Employees: Total Private,”
Federal Reserve Bank of St. Louis, last accessed May 29, 2017.)
It’s interesting to see in the above chart that the average hourly wage of American employees is the same today as it was in November 2016. If incomes aren’t rising but interest rates are rising, affordability in the housing market becomes an issue.
Home Buyer Perception
Finally, buyer perception is critical in the housing market. If home buyers don’t think it’s time to buy a house, it’s a problem that stunts demand.
According to a University of Michigan survey, in May 2017, U.S. consumers who believed that selling a home was a better idea than buying a home outnumbered those who thought the opposite. (Source: “Survey of Consumers,” University of Michigan, last accessed May 29, 2017.)
Housing Market Bubble Ready to Burst?
The worst part: the last time something like this happened was way back in 2006, just before the housing bubble burst!
Yes, the housing market has improved over the past few years, but now we have a completely different situation, as the three major factors affecting the housing market have now turned negative. And we can see the cracks in the housing market already starting to appear.
According to a U.S. Census Bureau report, between March and April of this year, sales of new homes in the U.S. economy declined by 11.4%, and the average selling price of a new home declined by 4.4%. (Source: “Monthly New Residential Sales, April 2017,” United States Census Bureau, May 23, 2017.)
I will be bold here and say that, in the second half of 2017 and in early 2018, we could see home prices fall sharply in the U.S. market. This will have severe consequences for our overall economy.
