- The US housing market looks like it’s headed for a recession, Wells Fargo has said.
- Mortgages spiking to nearly 8% would cause homebuying to plummet, the bank says.
- Strategists compared the situation to the 1980s when interest-rate hikes put pressure on the property market.
The Federal Reserve’s aggressive interest-rate hikes could be about to trigger a housing-market recession that echoes the slowdown of the 1980s, Wells Fargo has said.
The central bank has signaled in recent months that it’ll keep borrowing costs at a higher level for longer, well into 2024, in a bid to quell inflation — and that’ll fuel declines in both construction and activity, the bank says.
“After generally improving in the first half of 2023, the residential sector now appears to be contracting alongside the recent move higher in mortgage rates,” the economists Charlie Dougherty and Patrick Barley wrote in a research note last week.
“Although mortgage rates may gradually descend once the Federal Reserve begins to ease monetary policy, financing costs are likely to remain elevated relative to recent norms,” they added. “A ‘higher for longer’ interest rate environment would likely not only weigh on demand, but could also constrain supply by reducing new construction and discouraging prospective sellers carrying low mortgage rates from listing their homes for sale.”
The average 30-year fixed-rate mortgage has climbed from under 4% to just shy of 8% since the Fed started tightening in March 2022, data from Freddie Mac shows.
Higher borrowing costs have driven a decline in the construction of new US houses, further tightening a supply-starved market and encouraging many existing homeowners to stay put to cling to historically low rates they’d previously locked in. Just 1% of Americans sold their houses during the first half of 2023, data from Redfin showed.
In the 1980s, the Fed’s aggressive war on inflation drove 30-year mortgage rates as high as 19% — prompting homebuilders in Jackson, Mississippi, to send the central bank’s chair, Paul Volcker, lumber with the inscription: “Help! Help! We Need You. Please Lower Interest Rates.”
The Wells Fargo economists compared that desperate plea to a letter that the National Association of Realtors, Mortgage Bankers Association, and National Association of Homebuilders sent the Fed’s board of governors earlier this month. The three groups called the chair, Jerome Powell, to make clear that he was calling time on the bank’s current rate-hiking campaign.
“The plea for assistance from housing industry participants, both in the early 1980s and more recently, illustrates the severe impact higher interest rates can have on the residential sector,” Dougherty and Barley wrote.
“After perking up at the start of year, nearly every facet of housing activity has shown signs of relapse as the Fed has maintained a restrictive policy stance and mortgage rates have breached 7%,” they added, referring to the fact that home sales, mortgage applications, and indices tracking homebuilder confidence have all declined in recent months.
