This Isn’t Your Great Financial Crisis’s Housing Market

There’s always a pull to the past, even though, as everyone knows, prior investment results don’t guarantee future performance. To that end, RMB Capital produced a short new video in which partner and portfolio manager Ann Guntli went through some of the key issues.

As she noted, concerns about another housing crash have been growing as mortgage rates rise and demand slows (because mortgage rates are rising and pricing pressure, while starting to ease in some places, still leaves homes extremely expensive on the whole). But the fundamentals are different today.

First up, pointing to data from Realtor.com, Guntli noted that houses were on the market one day longer than the year before. Not a big increase, but it’s the first time that’s happened since June 2020.

Next, RMB’s graph of Federal Reserve data showing mortgage debt service payments as a percentage of disposable personal income (as a reminder, what’s left after taxes). Even with higher rates and house prices, the number is under 4%, which is the lowest since at least 1980. At the peak of the GFC, the figure was more than 7%. Remember that until the runup in housing prices, people were buying for years with low mortgage loans.

Inventory of homes is at historically low levels, which is probably a big reason why home prices haven’t dropped to pre-pandemic numbers. “On a positive note, the credit quality in mortgage originations is in much better shape than in the 2006 to 2008 housing bubble.” Widespread defaults are less likely than before.

The Case-Shiller Home Price Index showed a 19.7% year-over-year increase in housing prices in May 2022. That’s 15 percentage points higher than average in the index back to 1988.

But then, home prices are seeing some stabilization. Guntli says that it may be because of higher interest rates. Those rates are currently 5.5%, which is below the 40-year average of 7.0%, but it is sticker shock compared to rates just a year or two ago. Consumers have short financial memories, especially when, Guntli says, “homebuying was relatively cheap in 2020 and 2021, even as strong demand sent home prices skyrocketing.” With high prices and mortgage interest rates where they are, home purchase affordability is much tighter.

The good news for buyers is that because of these factors, housing prices are starting to cool. “New and existing home prices were down on a seasonably adjusted basis in June,” Guntli noted. Asking prices are starting to slow and falling housing prices are getting canceled at higher rates than in 2022 and prices have dropped more than any time since 2015.

In short, housing affordability remains low, prices are beginning to edge off, and investors are going to keep their eyes on housing prices, which are often a leading indicator of an economic slowdown.