Housing correction far from over – mortgage rates rise above 6%

This spring, the Fed dusted off its inflation-fighting playbook. It goes like this: The central bank is putting upward pressure on long-term interest rates – including mortgage rates – signaling that short-term rates will rise soon. These skyrocketing mortgage rates then push both home sales and home construction lower. This causes demand for commodities (such as lumber and concrete) and durable goods (such as counters and refrigerators) to fall. These economic contractions then spread throughout the rest of the economy and, in theory, help curb inflation.

The housing correction phase, of course, has already begun.

Across the country, home buyers are putting their home search on hold. On a year-over-year basis, new home sales and existing home sales are now down 29.6% and 20.2%. And the detached house begins mortgage purchase applications decreased by 18.5% and 23%, respectively. Simply put: Residential activity is shrinking—fast.

No matter what you call it—roof fix, housing slump, or housing slump—it’s far from over. Just look at mortgage rates. During the year, the average 30-year fixed mortgage rate was 3.1%. That’s long gone. On Thursday, it climbed to 6.23%—the second-highest 2022 mortgage rate reading.

If a borrower took out a $500,000 mortgage with an interest rate of 3.2%, they would see a monthly payment of $2,162. At a 6.23% interest rate, that monthly payment would be $3,072 for the 30-year loan. Those elevated mortgage rates—combined with frothy home prices that jumped 43% during the pandemic—simply put the new monthly payments out of reach for many would-be buyers. Other households (see chart below) have lost their mortgage eligibility altogether.

Check out this interactive chart on Fortune.com

As long as mortgage rates and home prices remain so high, industry insiders say the housing market will continue to decline.

Earlier this week, Goldman Sachs released a revised forecast. The investment bank now predicts that housing GDP will fall by 8.9% in 2022 and another 9.2% in 2023. That would mark the first housing downturn since the Great Financial Crisis. The guilty? The financial crisis (see chart below) caused by the spike in mortgage rates.

Check out this interactive chart on Fortune.com

The bad news for buyers? It could be a while before there is much rate easing.

“I still expect fixed rates to average 5.5% for the rest of the year,” says Mark Zandi, chief economist at Moody’s Analytics. Luck.

Once the US labor market begins to weaken, Zandi says, financial markets should begin to ease mortgage rates. In theory, a weakened labor market, combined with falling inflation, would lead the Fed to loosen its fight against inflation. However, if the overheated labor market continues, rates could rise even further.

“Of course, if the labor market remains resilient, the Fed will need to tighten even more aggressively than markets expect and mortgage rates [would go] higher and the absolute damage to the housing market [would be] longer,” notes Zandi.

Do you want to be informed about the housing correction? Follow me on Twitter at @NewsLambert.

This story was originally featured on Fortune.com

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