Mortgage Rates on the Rise, Do We Have Another 2008?

Mortgage Rates on the Rise, Do We Have Another 2008?

Housing prices soared through COVID and now with the Federal Reserve increasing interest rates, mortgage rates have followed suit and existing home sales have dropped for six straight months.  A recent article from First Trust provides good perspective between the events of today verse those of the Great Recession.  Below are highlights and you can read the full article here.

• New home sales are the slowest since early 2016
• Perhaps the most dramatic change is on prices. The national Case-Shiller index rose more than 1.0% in every month from August 2020 through May 2022. Every single month. Home prices rose a total of 8.9% in the first five months of 2022. More of the same. But then came June, when prices rose a meager 0.3%.
• Housing is going to feel some pain, but we are facing nothing like what happened in the last housing bust.

Last time….

• National average home prices bottomed in 2012 about 25% below where they peaked in 2007
• From peak to bottom, housing starts plummeted 79.0%
• New home sales fell 80.6%.
• Existing home sales dropped 52.3%

So why do we think we are not in for a huge housing disaster like last time?

1. 1. The last housing bust was preceded by several years of massive overbuilding….If anything, we’ve built too few homes this past decade, not too many.
   2. Although home prices have risen substantially since 2020, relative to replacement cost, they are only up about 2%.  The more it costs to replace your home, the more your current home is worth.
   3. In the current environment, where higher mortgage rates are persuading some potential home buyers to remain renters, landlords are in a much stronger position. The more a home can generate in rent, the more valuable the home.

The bottom line is that what we are seeing right now in the housing market is a bad case of indigestion from higher interest rates. The maximum drop in home prices from the peak to the bottom in this cycle should be around 5%, not a 25% implosion like last time.