'Housing market is looking increasingly vulnerable with a price correction possible': ING
"The housing market looks increasingly vulnerable given possible price corrections," says one economist.
ING's chief international economist, James Knightley, points out that the rapid rise in house prices is making it harder for potential buyers to save for a down payment, while inflation squeezes real incomes and hurts confidence.
"Furthermore, the latest real estate data shows that this sector is the most vulnerable to the rising interest rate environment, with the growing prospect of a slowdown and possible correction in the coming quarters," Knightley wrote in a recent statement.
The average mortgage rate for a standard 30-year loan rose to 5.3% last week. The average cost of a home was still at a record high of $391,200 in April,
Home prices have risen 35% nationwide since the pandemic began. Demand in 2020 and 2021 has been fueled by massive fiscal and monetary stimulus and home office opportunities. At the same time, supply was severely limited because construction activity only caught up slowly.
The tide could turn now.
Mortgage applications plummet as borrowing costs rise. The housing supply is expected to come on the market later this year, when demand may fall.
"As a result, we believe the rapid rise in house prices could level off quickly and potentially reverse," writes Knightley.
“On the negative side, this will hurt consumer sentiment as raising interest rates in a deteriorating housing market environment is never a good story. It would also weaken construction activity with a delay and hurt job prospects in the industry, which collectively accounts for 4% of GDP,” Knightley said.
FILE - Condos go up for sale in Boston's Dorchester neighborhood on Wednesday, August 18, 2021. Rising interest rates are making adjustable rate mortgages a more attractive alternative to standard 30-year fixed rate home loans. (AP Photo/Charles Krupa, file)
However, there is a "silver lining".
"Falling property prices would lower inflation faster," said the economist.
Lower inflation would allow the Fed to "reverse course and cut rates back to neutral more quickly, which would help prevent a broader and deeper economic downturn."
Ines is a market reporter for equities. Follow her on Twitter at @ines_ferre
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