麻豆传媒

News — Inflation, soaring interest rates and massive financial market volatility have dampened end-of-year projections for the U.S. economy. But housing, in a historically low mortgage-rate environment, has been an outlier amid the disorder – until recently. Now, clouds are on the horizon, says UMD Smith’s , and rumblings suggest all may not be well with U.S. housing. So, “to determine whether we’re looking at a Cat 5 hurricane or merely a steady rain, we need to scrutinize the host of variables affecting this market.”

First, significantly, there really is no such thing as a national housing market but rather “thousands of local housing markets that are driven by a combination of market fundamentals that push-and-pull on markets over economic cycles. This means some markets will hold up better than others over time because of these forces,” says Rossi, professor of the practice and executive-in-residence for the University of Maryland’s Robert H. Smith School of Business.

However, with the Federal Reserve in a real fight to combat inflation, the mortgage market is entering a cold winter. Rossi adds, “with rates on fixed-rate 30-year mortgages above 7% for the first time in many years, mortgage demand has been crushed.”

A countervailing effect, though, is that the housing market has experienced an abnormally low level of supply. In other words, “months of housing inventory – usually around five-to-six months or so for a ‘normal’ market has been hovering around two months for most of 2022,” Rossi says. “This should hold back markets from experiencing a serious decline in home prices over the next year.”

Rossi says housing prices will continue to decelerate as mortgage rates continue to climb with further Fed rate hikes. Should a recession materialize in 2023, this would further drive down home prices, but a fair amount of uncertainty persists about the timing and depth of such a downturn.

The effect on lenders and servicers is a wildcard here. “Expect a significant amount of consolidation in the industry most notably among non-bank originators and servicers,” he says. “These institutions swept into the mortgage market in the years following the 2008 crisis and now dominate originations and servicing in the mortgage market for all investor types.”

These firms are only regulated at the state level from a safety and soundness perspective and tend to have less capital and liquidity on hand in the event of a significant downturn. This makes them significantly riskier than federally regulated depositories such as commercial banks.

Originators are struggling to make money in a purchase money environment where borrower refinances have dried up as rates have risen. “Many people who refinanced their mortgage at 3% are in the catbird seat now and will not be as motivated to sell their home as a result,” Rossi says. “This phenomenon will also hold housing inventory levels down.”

The Projection

“Generally, we are in for a bumpy ride in housing for the next 12 months, but we shouldn't expect it to look anything like 2008-2009,” Rossi says. “This looks to be more of a reversion to the mean from a period of lofty house-price appreciation.”

Rossi says, “if pressed, I could see “a 3-8% decline in home prices with 5% down being my expected level over the next 12 months. This would be conditional on a Fed terminal rate of 4.75% by the first part of 2023, a mild recession sometime in the mid-to-late part of the year, and unemployment rates no more than 5-6%.” But he adds, these, among other factors, obviously hang in the balance.

Variables and Wildcards

Deviations from these assumptions on either side would affect these home price projections, Rossi says. One of the trickier issues is figuring out what the Fed will do if the economy does enter a recession. “Would they start lowering rates or hold the line to finish the job on inflation? Right now, the Fed seems poised to fight inflation first and then deal with the aftermath. That strategy coupled with the long lags in monetary policy have me leaning more to a higher likelihood of recession.”

Another wildcard is job openings as described in the Job Openings and Labor Turnover Survey (JOLTS) report. “Should job numbers remain at elevated levels, the Fed might feel more emboldened to hold the line against lowering rates in the face of a recession.”

Advice for Prospective Buyers

Typically, during a recession when unemployment rates rise, mortgage delinquencies follow. “Expect any recession in 2023 to lead to those same outcomes, but I do not expect any crash in housing as a result.”

Rossi concludes: “In this environment and if you have a low mortgage rate -- unless some life change dictates otherwise, I would stay put as this period of market uncertainty unfolds, I would bolster my short-term finances for repairs and other unexpected expenses including much higher maintenance costs (e.g., utility bills) during this winter of housing discontent.”