Housing Market Faces Red Alert As Mortgage Rates Near 7%

Mark Zandi, the chief economist at Moody’s Analytics, has escalated his warnings about the housing market, shifting from a "yellow flare" to a "red flare" in just a few weeks. He cautions that unless mortgage rates drop significantly from their current near 7% level, home sales, homebuilding, and prices are likely to decline. Zandi's pessimistic outlook is based on the current economic conditions and the high mortgage rates, which he believes are unlikely to decrease soon.

Zandi's concerns are not unfounded. Existing home sales, while unexpectedly rising in May, still marked the slowest sales pace for any May since 2009. This indicates that the typically busy spring selling season has been lackluster. Additionally, sales of new single-family homes dropped by 13.7% in May compared to the previous month, and single-family housing starts decreased by 4.6% in June, with permits also declining.

Zandi attributes the current state of the housing market to homebuilders providing rate buydowns to prop up sales, but he notes that many builders are now delaying their land purchases from land banks. This, he says, is a clear sign that new home sales, starts, and completions will soon fall. He also points out that home prices, which had held up well, are now stagnating and set to decline as high mortgage rates dampen demand.

The latest Case-Shiller home price report supports Zandi's view, showing a 0.3% monthly fall in the 20-city index in April, which is steeper than March’s downwardly revised 0.2% dip. Furthermore, the latest Housing Market Index survey from the National Association of Home Builders indicates that 38% of builders cut prices in July, up from 37% in June, 34% in May, and 29% in April.

Increased supply is also putting downward pressure on prices. Home listings have been climbing as homeowners with low, pre-pandemic mortgage rates eventually need to sell their properties and buy new homes at higher rates. Zandi notes that these homeowners, given their demographic and job situations, must move and can only delay these needs for so long. Many homeowners who listed their properties are taking them off the market after failing to find a buyer at the price they were offering. Delistings are up 35% year to date and 47% year over year in May, outpacing active listing growth of 28.4% and 31.5%, respectively.

Zandi believes that the housing market's weakness will soon become a significant drag on overall economic growth. He warns that housing will be a full-blown headwind to broader economic growth, adding to the growing list of reasons to be worried about the economy’s prospects later this year and early next. This pessimistic outlook is shared by analysts at Citi Research, who pointed out that residential investment is the best leading indicator of an oncoming recession. They noted fewer permits for single-family-home construction and an increase in the effective supply of homes on the market amid weak demand. Median home prices of existing homes were also falling on a monthly basis, signaling that mortgage rates around 7% are too high to sustain an expansion.