The largest US banks reported relatively solid third-quarter earnings on Friday. But within those reports, investors found ominous clues about the future of the housing market, underscoring fears of an upcoming crisis.
What's happening: JPMorgan reported that third-quarter home lending revenue plunged 34% from a year ago, and Wells Fargo logged a drop of 52% over the same period. The declines were due primarily to a spike in interest rates leading to a slowdown in demand for mortgages. Citigroup and Morgan Stanley also reported that mortgage loan growth was moderating.
As the Federal Reserve raised interest rates this year, mortgage rates also spiked to their highest level since 2002. Higher mortgage rates and elevated home prices could quickly lead to an end to the pandemic housing boom, but the Federal Reserve thinks that's a good thing.
"We've had a time of a red-hot housing market all over the country," Fed President Jerome Powell told me in September. "For the longer term what we need is supply and demand to get better aligned so that housing prices go up at a reasonable level...and people can afford houses again. We probably have to go through a correction to get back to that place."
Powell's prescription for what he referred to as a "difficult" housing correction has led to worries of another 2008-esque housing and financial collapse.
Data shows that the market is clearly in slowdown mode.
Home sales declined for the seventh month in a row in August and sales of existing homes -- which include single-family homes, townhomes, condominiums and co-ops -- were down 19.9% from a year ago, according to a report from the National Association of Realtors.
Home prices are still on the rise, but they're beginning to ease. Prices grew 15.8% in July from the year before. That's a smaller jump than the 18.1% growth seen in June, according to the S&P CoreLogic Case-Shiller Index. The 2.3 percentage-point difference between those two months is the largest deceleration in the history of the index.
"This is the sharpest turn in the housing market since the housing market crash in 2008," said Redfin's chief economist, Daryl Fairweather, last month.
This isn't 2008: Market conditions are very different than they were in 2008. Analysts are telling homebuyers and investors not to panic. And housing inventory remains low, which prevents a crash in price as demand tempers.
"There was a housing shortage of around 5 million homes before the onset of the pandemic. That shortage is not going away soon," said Lawrence Yun, chief economist with the National Association of Realtors trade group, in a report last month.
Homeowners locked into 30-year low-rate mortgages are also reluctant to sell their homes and switch to higher rates.
JPMorgan Chase CFO Jeremy Barnum said in response to a question from CNN Business Friday that he is "not expecting a big crash" in housing along the lines of what happened during the Great Recession of the late 2000s.
Home prices have soared over the last decade, leaving homeowners with a nice cushion to lean on, said Barnum.
Barnum also noted that lending standards have tightened in the past 14 years. The 2008 crisis was exacerbated by very loose oversight of the mortgage market.
Employment and wage growth remains healthy, meaning homeowners can afford their mortgages and aren't being forced to sell their homes like they were in the great recession of 2008.
What's next: Investors will next look to housing starts data next week as an indicator of where the housing market is headed.
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