Save time by listening to our audio articles as you multitaskBut Ms Zelman, who has gone from investment banks to running an analysis firm, also knows the current rally is different from past ones, which suggests the downside may be less severe. Start with the evidence of potential danger. Prices have surged in America since early in the pandemic, much as they have throughout the rich world.
One critical variable is now changing, and rapidly at that, owing to the monetary-policy decisions of the Federal Reserve. Although the Fed has raised short-term interest rates by only a quarter of a percentage point so far this year, mortgage rates have soared by more than 1.5 points as investors price in more tightening to come. Normally, such a steep increase would cool the housing market, making monthly payments increasingly unaffordable.
Yet thus far the red-hot market has remained resistant to rising mortgage rates. Partly that is because so many Americans took advantage of the extremely low rates available during the pandemic to take out new financing. About 70% of homeowners now have mortgages with rates of less than 4%, according to Ms Zelman. In 2018 just about 40% enjoyed such low borrowing costs.
Resistant to rising rates, though, does not mean impervious. At some point high borrowing costs will crimp demand. Moreover, the fundamentals underpinning the property rally—the limited supply of new homes—may prove to be, in part, an artefact of the pandemic. Nearly 1.6m homes are under construction nationwide, the most since the early 1970s. The problem is that the housing sector is, like other parts of the economy, suffering from labour shortages and gummed-up supply chains.
Ms Zelman is far from alone this time in her warnings. On March 29th a group of researchers with the Dallas Fed noted that their “exuberance indicator”, a gauge to detect housing bubbles, was flashing red. “Our evidence points to abnormalhousing-market behaviour for the first time since the boom of the early 2000s,” they wrote. Few expect a repeat of the collapse that followed that boom. Homeowners have healthier balance-sheets than they did 15 years ago, and borrowing standards are stricter.
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Yes please! I've been looking to buy a house but these prices are rediculous
Panic driven by the banks and press .
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Source: Daily Express - 🏆 26. / 68 Read more »