Last week, the Federal Reserve warned of the risks facing the commercial real estate sector since the sharp jump in interest rates over the past 14 months "increases the risk" that commercial real estate loans will be difficult to refinance. Unfortunately, it isn't only the residential sector that looks vulnerable. Commercial real estate is where the bigger problems lie Construction of new homes would inevitably fall as well. House price-to-income ratios remain extremely elevated, and for them to return to long-run averages, we would likely need to see prices fall by around 20-25% in the absence of any rise in incomes.
In this scenario, falling demand and rising supply mean falling property prices would be the likely outcome. Should the US economy experience a hard landing and the start of a rise in unemployment, this would threaten a rise in default rates and an increase in the supply of homes for sale. Macrobond, ING If unemployment turns, then rising supply could mean accelerating price falls Higher borrowing costs and elevated prices have led monthly mortgage payments to surge Twelve months ago, this was $1750 per month.Ĭonsequently, if you are considering buying a home today, you are looking at an annual mortgage cost of around $33,650 on average which, given a median pre-tax US household income of a little under $75,000, points to ongoing weak demand unless prices fall substantially or borrowing costs plunge.
The latest weekly Mortgage Bankers Association data showed that the typical mortgage for a new home taken out last week was a 30Y fixed rate product with a size of $440,400 at a rate of 6.57%, giving a monthly mortgage payment of $2804, a record high. New home sales are outperforming existing home sales as mortgage applications point to weakening demandĪffordability will remain a key constraint that points to downside risks for transactions. New home sales have consequently been performing more strongly despite the drop in mortgage applications for home purchases - the buyers that are out there simply don't have much to choose from. The more than doubling of mortgage rates over the past 18 months means many homeowners who would like to move are effectively locked in by the cheap financing they secured on their current property. Higher borrowing costs and a general lack of affordability after prices rose nearly 50% through the pandemic have constrained demand, but we also have to recognise there is a lack of supply out there, which is also contributing to lower transaction numbers. Sales had been as high as 6.3mn as recently as January 2022.
By James Knightley, Chief International Economist Existing home sales remain under pressure from affordability issues and a lack of optionsĮxisting home sales fell 3.4% in April to an annualised 4.28mn, versus expectations of a 4.3m outcome.
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