House prices won’t fall below pre-pandemic levels

on Nov 4, 2022
Updated: Dec 9, 2022
  • 30 year mortgage rates are now above 7% for the first time since 2002, having been 3.1% a year ago
  • House prices are yet to dip but that should change
  • Even so, prices rose 44% during COVID and are unlikely to fall that low again

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Having written about the latest interest rate hikes yesterday, I wanted to take a look into what it all means for the housing market. There has been a lot of jarring headlines in this area recently and one could be forgiven for thinking that the roof is caving in (pun intended!).

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So, what does all this interest rate chat mean for mortgages and the housing market?

Mortgage rates

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The Fed interest rate – which sets the benchmark for all rates in the economy, from credit card debt to business loans to mortgages – is at the highest rate since the Great Financial Crash in 2008, with the Fed saying 4.5% will be hit in short order (and many expecting 5%).  

The Fed rate is short-term, but mortgage rates are linked to it. The average rate on a 30-year fixed rate mortgage rose up past 7.08% this week. For comparison, that is over double what it was only one year ago, at 3.14%. Ouch.

It is the first time the 30-year has broken 7% since 2002, when George Bush was President, the first Lord of the Rings movie was released and the euro was introduced in Europe.

Housing Market

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So, what does this mean for house prices? With higher mortgage rates, the price of houses must come down, right?

Pretty much. Higher interest rates slow down the economy in general; that is exactly what they are designed to do, as lower consumption and less money floating around will curtail inflation – exactly the motive behind the Fed raising interest rates.

Consumers are not only seeing higher mortgage payments, which obviously makes buying a house less attractive, but they also see higher costs everywhere they look – not exactly stimulus for purchasing a house.

However, in looking at the data, house prices are yet to move significantly. The first conclusion to draw for this is that the data is lagged – houses are illiquid and transactions take time, hence traditionally there is a lag when rates rise vs when prices fall.

Secondly, while demand for housing is falling in relation to the aforementioned factors, supply of houses has also fallen, which has the opposite effect of pushing house prices up. The biggest factor for this is that many of these houseowners are sitting pretty on a mortgage rate from last year – at 3% or lower – and hence it makes zero sense for them to trade in, only to take out a mortgage today at 7%.

What will happen house prices in the future?

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This has become a real buzz topic. While the supply falling has propped the market up, and the fact data is lagging, it is near certain that numbers will come out before long that show house prices falling.

This is simply what always happens historically; once mortgage rates rise, house prices come down. Coupled with that is obviously the other macro variables here too, with recession a stark possibility. While consumer demand and the labour market have remained relatively stubborn, this is partially why inflation has not come down as fast as the Fed would have hoped – and once creaks appear in those markets (which they must do for inflation to come down) sentiment will dip further and house prices should dip again.

Nonetheless, the possibility of a massive fall in house prices in desirable (big city) areas, such as New York, appears remote.

It is important to look at context here, too. While homeowners will be concerned at chunkier mortgage payments and wobbling prices, one would need to paint an absolute disaster scenario to forecast house prices lower than pre-pandemic levels.

Looking at the US median price, house prices were 44% as of Q2 this year (the most recent data) compared to April 2020.

 Of course, the above data is a national average and will be skewed for geographical areas. However it does paint a picture of how hefty the pandemic rise was, and it also shows that historically, house prices go up in the long-term.

Even looking at the worst housing crisis in recent memory – the 2008 crash that was quite literally caused by the mortgage market – house prices were back above the pre-crash peak within 6 years. Not fun, yeah – but that is the worst housing rout in modern history.

There is definite pain ahead for homeowners, but if the higher monthly mortgage payments can be met, they can take solace from the fact that in the long-term, prices should be fine, while even a short-term dip is unlikely to hit pre-pandemic levels.


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