The Housing Market Conundrum: Rising Mortgage Rates vs. Soaring Prices

After the 10-year U.S. Treasury yield reached a 16-year high, mortgage rates also experienced the biggest increase, breaking the 8% mark on October 18, reaching the highest level since 2000. However, such rate risks have led to a sharp decline in mortgage applications, dropping to a historic low in nearly 30 years. Additionally, statistics indicate that the volume of existing home sales in the United States plummeted by 15% in September, marking the lowest record in 13 years. CPT Markets analysts mentioned that existing home sales account for 85% of the overall real estate transactions in the United States. Hence, it serves as a crucial indicator not only for assessing the vitality of the U.S. real estate market but also for the overall economic prosperity.

Several factors have interacted to ultimately lead to the rise in 30-year mortgage rates. These factors include changes in the level of inflation, the health of the job market, and investors' uncertainty about the Federal Reserve's future policies. However, another major driver is the rise in the 10-year U.S. Treasury yield. As the returns on regular deposits provided by banks are relatively high and less risky, many investors have shifted their funds towards regular savings. This has led to a selling spree of bonds, increasing the supply in the bond market and causing bond prices to fall. In order to attract investors to continue participating in the bond market, bond rates must inevitably be increased. This market dynamic has indirectly influenced the upward trend of mortgage rates, resulting in increased borrowing costs. Interestingly, the minimum standard for mortgage rates varies across different regions in the United States. This disparity may be influenced by various factors such as the credit score levels in each state, the average loan types and amounts, and the risk management strategies of different lending institutions.

Normally, in the face of continuous upward pressure on mortgage rates, the public worries that future housing expenses will become unaffordable, and real estate market transactions should significantly cool down. However, the contradictory fact is that why have house prices in the United States not only not fallen but continued to rise since the beginning of the year? In fact, the U.S. real estate market has seen a phenomenon of "reduction in quantity and increase in price". CPT Markets analysts state that the continuously rising mortgage rates have suppressed the willingness of sellers who already have low-rate mortgages to sell because they are unwilling to give up the low-rate loan terms they currently possess. This has led to a long-term maintenance of low housing supply in the market, preventing house prices from declining due to the rise in interest rates. Looking at it from another perspective, the decrease in buyer demand and the limited housing inventory have created a push-pull effect, meaning that although the decrease in buyer demand puts pressure on prices, the scarcity of inventory also drives prices up. However, ultimately, due to the historically low volume of homes for sale, the market's supply and demand conditions have been severely hit, causing more and more buyers to be unable to afford houses while house prices continue to rise.

What makes the market particularly curious is why the 30-year mortgage rate in the United States has hit a record high, but the mortgage default rate is less than 2%? CPT Markets analysts point out two main reasons for this:

u  Since 2022, the market's home buying demand has declined, indicating that currently, fewer than 20% of U.S. home buyers are purchasing at rates above 6%.

u  Most U.S. homebuyers choose fixed-rate mortgages, and these types of mortgages are usually tied for a long time. In other words, when buying a house, they will more cautiously assess their future repayment capacity.

The rise in borrowing costs, repeated highs in house prices, and extremely limited inventory of homes for sale have led to a weak housing market situation that has lasted for more than a year. However, this real estate market downturn is fundamentally different from the one caused by the bursting of the real estate bubble in the early 21st century because at that time, the U.S. economy plunged into a severe recession, and millions of homeowners lost their homes due to the loss of their mortgage redemption rights. CPT Markets analysts estimate that the total volume of existing home sales in the United States in 2023 is expected to be around 4.1 million units, which will hit the lowest level of annual sales since the 2008 global financial crisis. Considering that loan rates may remain at relatively high levels, it is unlikely that sales will increase significantly next year. In summary, influenced by the extremely low inventory, the future housing market is still at a high risk of fluctuations. In terms of volume, high rates will have a long-term impact on housing demand. Although the U.S. housing market seems to be trying to enter a soft landing environment, whether it can land safely still depends on market volume, which is closely related to whether the Federal Reserve has room for preventive rate cuts next year.

Author: Reese Fan Holmes C.

Editor: Raouf Boussaoui